Responding to WMD Terrorism Threats: The Role of Insurance Markets

Abstract

Insurance offers three important benefits that help an economy deal with the catastrophic losses that arise from both natural disasters and man-made events: risk sharing, mitigation, and price discovery. This paper develops the role insurance can play in dealing with the losses that could be created by terrorists attacks using weapons of mass destruction (WMD). Although the benefits of insurance would generally rise with the size of the possible loss, private insurers have generally been unwilling to cover the largest of all risks, a WMD terrorist attack. Policy proposals to solve this market failure have been both politically and economically contentious. This paper provides a comprehensive survey of the issues that arise in providing insurance against WMD terrorist attacks and evaluates alternative solutions for the United States. It describes the range of governmental solutions that have been tried or are currently proposed for insuring terrorism risks and provide an analysis of the issues and an evaluation of the best means for providing viable WMD terrorism insurance for individuals and firms.