Terrorism Insurance Research Articles

How Does the Corporate World Cope with Mega‐Terrorism? Puzzling Evidence from Terrorism Insurance Markets

Terrorist attacks that have succeeded abroad since 2001, as well as others that were prevented, indicate that the threat of a large‐scale attack is real and will be with us for a long time. Focusing on the United States, the United Kingdom, and Germany, this article analyzes the role that insurance can play in providing commercial enterprises with financial protection against the economic consequences of major terrorist attacks.The article begins by explaining the design and key features of terrorism insurance programs operating today in each of the three countries (TRIA in the U.S., Pool Re in the U.K., and Extremus in Germany). The authors then provide a detailed comparative analysis of the evolution of prices and take‐up rates (based on as yet unpublished data), with particular attention to financial institutions. For those who think the U.S. is the most likely target for mega‐terrorism, the findings are somewhat puzzling. On average, for example, companies in the U.S. do not pay even half as much for comparable coverage under TRIA as companies pay in Germany under Extremus, which raises the questions: Is terrorism coverage under the U.S. insurance program now drastically underpriced? If so, what would be the likely consequences of another large‐scale attack in the U.S.? On the demand side, the authors observe a dramatic increase in take‐up rates in the U.S. since 2003, revealing increased corporate concern. By contrast, the market penetration in Germany remains remarkably low.A better understanding of these programs and of the recent evolution of terrorism insurance markets in the U.S. and Europe should help corporate and government decision makers develop more effective protection against the economic consequences of mega‐terrorism.

Wege zur Versicherung des Terrorrisikos

: This article analyses the economic impact of terrorism on different countries and discusses the impact of terrorism on their property insurance markets. In the aftermath of September 11, 2001 co-operation between governments and the national insurance industries has often been necessary to ensure an adequate supply of insurance coverage. Therefore the article justifies this co-operation as an exception to general economic principles. Furthermore, the article presents an insight on the construction of the German terrorism insurer Extremus. It discusses the characteristic elements and distinguishes Extremus from solutions in other countries. Finally, the article argues that in the future alternative risk transfer will not be a real replacement for terrorism insurance and that international co-operation of governments to establish a world-wide terrorism cover will be extremely difficult.

The Economic Effects of Federal Participation in Terrorism Risk

AbstractThe catastrophic terrorist attack of September 11, 2001 caused unprecedented insured losses. While the insurance industry covered these losses, it also took swift steps to limit its exposure to such risks in the future. In response to ensuing market dislocations, the Terrorism Risk Insurance Act (TRIA) was passed in 2002. The law temporarily requires primary insurers to offer terrorism coverage and creates a federal “backstop” to limit losses on such coverage. In anticipation of the program's scheduled expiration, and to inform debate on its possible extension, this article analyzes market developments in the wake of 9/11 and the passage of TRIA. We find that to date, TRIA has facilitated private sector participation in the market for terrorism insurance by lending structure to an otherwise ill‐defined risk. While alternative terrorism risk bearing mechanisms are evolving, none appear ready to replace federal involvement presently. We conclude that a continuation of TRIA for a period of time would enhance U.S. economic performance in the near term. Failing to extend TRIA in the near term would result in decreased economic performance absent another major terrorist attack and greater instability, job loss, and bankruptcy in the event of another attack.

Economic Perspectives on Terrorism Insurance

This study examines the market for terrorism insurance in the United States, discusses the economic implications of the cost and availability of terrorism insurance and considers the proposed federal role in terrorism insurance. The study reaches two principal findings. First, the market for terrorism insurance remains limited. Only a small number of insurers are actively providing stand-alone terrorism insurance policies. When available, coverage for terrorism losses is expensive, terms of coverage are restrictive and policy limits are often insufficient. Second, the problems associated with terrorism insurance pose a significant threat to sustained economic growth. The lack of terrorism insurance is stopping some business deals, such as real estate and construction projects where terrorism insurance may be necessary to obtain financing. The high cost of terrorism insurance (when available) diverts resources from other more productive uses, negatively affecting investment and jobs. Low coverage limits in terrorism insurance policies mean that businesses are bearing a huge amount of risk themselves. In the event of another attack similar to that of September 11th, insurance payments will not be available to the same degree to rebuild.

Best practices in commercial real estate financing insurance and commercial mortgages in the new world of risk

Understanding the basics of commercial property insurance and how changes to the terrorism risk and insurance act will affect the insurance industry.

Terrorism Risk Coverage in the Post-9/11 Era: A Comparison of New Public–Private Partnerships in France, Germany and the U.S.

The paper discusses the development and operation of terrorism insurance programmes established in France, Germany and the U.S as reaction to 9/11. These three programmes are all based upon a public–private partnership with government backup. However, there are some fundamental differences regarding issues such as exclusions, price differentiation, risk mutualization, current level of terrorism insurance demand and the government exit strategy. In particular, significant differences of prices and degree of market penetration in the three countries have been observed and we discuss some factors that could contribute to this. Recent changes in the nature of international terrorism worldwide indicate that these issues will remain in our future. Hence, we think that government and industry would at the very least benefit from better understanding of how others operate abroad.

Policy: Watch Challenges for Terrorism Risk Insurance in the United States

This paper examines the role that insurance has played in dealing with terrorism before and after September 11, 2001, by focusing on the distinctive challenges associated with terrorism as a catastrophic risk. The Terrorism Risk Insurance Act of 2002 (TRIA) was passed by the U.S. Congress in November 2002, establishing a national terrorism insurance program that provides up to $100 billion commercial coverage with a specific but temporary risk-sharing arrangement between the federal government and insurers. TRIA's three-year term ends December 31, 2005, so Congress soon has to determine whether it should be renewed, whether an alternative terrorism insurance program should be substituted for it, or whether insurance coverage is left solely in the hands of the private sector. As input into this process, the paper examines several alternatives and scenarios, and discusses their potential to create a sustainable terrorism insurance program in the Unites States.

Insurance, self-protection, and the economics of terrorism

This paper investigates the rationale for public intervention in the terrorism insurance market. It argues that government subsidies for terror insurance have the effect of discouraging self-protection and limiting the negative externalities associated with self-protection. Cautious self-protective behavior by a target can hurt public goods like national prestige if it is seen as “giving in” to the terrorists, and may increase the loss probabilities faced by others by encouraging terrorists to substitute toward more vulnerable targets. We argue that these externalities in protection are essential for normative analysis of government intervention in insurance markets and may also explain why availability problems in this market have engendered much stronger government responses than similar problems in other catastrophe insurance markets.

An empirical analysis of the economic impact of federal terrorism reinsurance

This paper examines the role of the federal government in the market for terrorism reinsurance. We investigate the stock price response of affected industries to a sequence of 13 events culminating in the enactment of the Terrorism Risk Insurance Act (TRIA) of 2002. In the industries most likely to be affected by TRIA—banking, construction, insurance, real estate investment trusts, transportation, and public utilities–the stock price effect was primarily negative. The Act was at best value-neutral for property-casualty insurers because it eliminated the option not to offer terrorism insurance. The negative response of the other industries may be attributable to the Act's impeding more efficient private market solutions, failing to address nuclear, chemical, and biological hazards, and reducing market expectations of federal assistance following future terrorist attacks.

Catastrophe risk, insurance and terrorism

This article empirically investigates how the terrorist activity of September 11, 2001, was addressed by the insurance industry and government in the United States. It shows that the insurance system worked reasonably well in compensating losses suffered, albeit with various tribulations. It also demonstrates that the insurance industry, along with government as the ultimate risk manager, imaginatively reconfigured markets to continue terrorism insurance coverage in many contexts. The findings challenge many of Ulrich Beck’s contentions about catastrophe risks and insurability. At the same time, they indicate the fragility of the insurance system. Insurers’ perceptions and decisions about uncertainty – with potential for windfall profits as well as catastrophic losses – create crises in insurance availability and promote new forms of inequality and exclusion. Hence, while the insurance industry is a central bulwark against uncertainty, insurers can also play a key role in fostering it.

War and Terrorism Insurance: How to Promote Long-Term International Stability and Affordability

The December 2002 issue of this journal was dedicated to an examination of the varied responses of governments and aviation insurers following September 11, 2001. This article builds on those experiences to suggest that the leading economies of the world can lay foundations for a comprehensive international structure of stable and affordable insurance for War and Terrorism risks covering all classes of personal and commercial insurance business – not limited to any one sector such as aviation, marine, energy, automobile, property, life etc. Making best use of existing resources will require a permanent partnership between States and the insurance/reinsurance communities using the age-old practice of spreading risk as widely as possible (Appendix A). These principles are embodied in a Draft Convention (Appendix B) – submitted as a focus for discussion and implementation based on the concept of insured Sovereign Risks i.e. the risks to civilians, commerce and private property in general, arising out of acts by or against States.

An Empirical Analysis of the Economic Impact of Federal Terrorism Reinsurance

This paper examines the role of the federal government in the market for terrorism reinsurance. We investigate the stock price response of affected industries to a sequence of thirteen events culminating in the enactment of the Terrorism Risk Insurance Act (TRIA) of 2002. In the industries most likely to be affected by TRIA - banking, construction, insurance, real estate investment trusts, transportation, and public utilities - the stock price effect was primarily negative. The Act was at best value-neutral for property-casualty insurers because it eliminated the option not to offer terrorism insurance. The negative response of the other industries may be attributable to the Act's impeding more efficient private market solutions, failing to address nuclear, chemical, and biological hazards, and reducing market expectations of federal assistance following future terrorist attacks.

An overview of The Terrorism Risk Insurance Act of 2002

The intent of this paper is to provide an overview of the principal provisions of the Terrorism Risk Insurance Act of 2002 (the ‘Act’),1 which became law in the USA on 26th November, 2002, and the practical effects which the Act has had on the state of terrorism insurance coverage as it had evolved between 11th September, 2001 and the passage of the Act. The Act voids some of the exclusions which had made their way into insurance policies (particularly post‐9/11) relating to losses from certain ‘acts of terrorism’ (as defined by the Act) and requires insurers meeting certain criteria to ‘make available’ terrorism insurance coverage to their insureds. The Act also establishes a temporary federal reinsurance programme which provides a system of shared public and private compensation for insured losses resulting from certain certified acts of terrorism. From the standpoint of the average insured, however, the practical impact of the Act has been far less dramatic than may appear on the face of it. As The Department of the Treasury explained in its Final Rule,2 one of the main purposes of the Act was to address market disruptions that resulted in the aftermath of the September 11th terrorist attacks on the USA and to ensure the availability and affordability of property and casualty insurance for certain risks associated with acts of terrorism. In addition, the Act was designed to provide a transitional period for the private insurance markets to stabilise, thereby allowing insurance companies to resume pricing terrorism insurance coverage. The Act also sought to build capacity in the insurance industry to absorb any future losses, while preserving insurance regulation and consumer protections in the individual states.

Insuring against Terrorism: The Policy Challenge

The terrorist attacks during the past decade in London, Israel, the United States, and elsewhere have spawned an interest in understanding not only how governments can mitigate terrorism risk but also how governments might help to finance future losses. A burgeoning academic literature—and an intense lobbying effort by various industries—have argued that government assistance is needed due to a host of problems: the large size of potential losses, the difficulty of pricing the losses, the government's existing role as the guarantor of last resort, asymmetric information, the relationship between terrorism losses and government military policies, and other reasons. These arguments served as an important catalyst for the Terrorism Risk Insurance Act (TRIA) that President Bush signed into law in November 2002. Although TRIA's passage was held up in Congress for almost a year over a debate on limiting tort actions, both Democratic and Republican leaders supported the act. Over the past fifty years, the public has accepted a larger role for the government in insuring natural catastrophic losses.1 The general acceptance of the U.S. government's role in financing non-natural terrorist [End Page 139] losses, therefore, is probably not surprising, especially since the losses are partly in the government's control. This paper takes a contrarian view. I argue that mostly unfettered insurance and capital markets are capable of insuring large terrorism losses, even losses ten times larger than the $40 billion loss incurred on September 11, 2001. A $400 billion loss in capital markets is common. U.S. capital markets alone routinely gain or lose $100 billion on a daily basis and often several trillion dollars on a monthly basis. Moreover, a significant amount of these risks can be traced to new companies that have very little history or few close substitutes from which investors can accurately assess future earnings. Furthermore, a significant amount of the net earnings of most corporations is influenced by the government's nonmilitary policies through a vast sea of tax regulations, oversight regulations, and torts. Despite these numerous problems and government policy risks, investors provide enormous liquidity to U.S. firms, producing one of the most efficient mechanisms for financing risks that has ever existed. Product and environmental liability markets have also remained vibrant despite shifting court standards during the 1970s and 1980s that generated large, correlated losses to insurers. Indeed, shifts in legal standards are probably less predictable than many terrorist acts. So why do insurers appear to have a hard time providing insurance against a large loss that is "chicken scratch" in comparison to daily losses in other capital markets? This paper argues that capital and insurance markets are not to blame. Rather, if there is any "failure," it rests with government policies. Government tax, accounting, and regulatory policies make it costly for insurers to hold surplus capital. They also hinder the implementation of instruments that could securitize the underlying risks. In other words, the "market failures" that appear to justify government intervention in the terrorism insurance market are best viewed as "government failures." Correcting these policies would likely enable private insurers to cover both terrorism and war risks. To be clear, the purpose of this paper is not to provoke. In general, I believe that government policy, including progressive income taxation, can sometimes play an important role in enhancing risk sharing.2 Indeed, one of the justifications for the government's largest historic intrusion into insurance markets—the creation of the Social Security system—is that people are either too myopic (if they do not anticipate retirement) or too [End Page 140] smart (if they strategically save too little in order to rely on public aid) for their own good or the good of society. But the idea that government tax and regulatory policies can hinder the development of insurance markets and securitization should not be surprising. For example, whereas the commercial mortgage-backed securities market was very small a decade ago, deregulation...

Treasury works to implement Terrorism Insurance Act

Treasury works to implement Terrorism Insurance Act

Terrorism insurance subsidies and social welfare

A model of the effects of terrorism risk on building construction suggests that subsidy of terrorism insurance can increase social welfare. Such a subsidy program should cover a fixed level of risk per location.

War and Terrorism Insurance: Plans for Long-term International Stability and Affordability

The horrors of 11 September 2001 are not confined to human tragedies. The impact on thewideworld of insurance and reinsurance is on a scale comparablewith the ongoingwar on terrorism. Insurers in the most exposed classes of business, who were entitled to cancel cover for such risks at short notice, began to do so. Reinstatement, when available, was obtainable only for reduced cover at increased rates. Fresh capital, unencumbered by prior losses, emerged to surf new premium opportunities. Governments were asked to plug the gaps. The air transport industry, which was obviously in the front line, was outraged by what it believed to be concerted disloyalty and opportunism on the part of liability insurers. The CompetitionDirectorate of the EuropeanUnion started an investigation. Newmutual liability risk-bearing associationswere proposed inEurope and in theU.S. The role of governments as liability insurers of last resort is being explored to the limits, most notably in proposals for a worldwide specialized commercial insurance vehicle to be supported by State Parties to the 1944 Chicago Convention as a result of studies organized under the auspices of the International Civil Aviation Organization. And all because aviation liability ‘‘all risks’’ insurers were acting responsibly, first and foremost, by ensuring survival of the worldwide aviation insurance market, thereby enabling cover to continue for essential, traditional risks. Part of the price paid for such survival and continuitywas a dramatic reduction in the cover for any liability to third parties which might arise out of a wide spectrum of destructive causes outside the insured’s control (typified by the London market exclusion AVN 48B), including (but not restricted to) risks frequently abbreviated to ‘‘war and terrorism’’. Hitherto, in a strongly competitivemarket, this part of third-party liability risks had not attracted significant premium, despite several previous illustrations (e.g., PanAm and Lockerbie): 11 September

Insuring against Terror?

On November 26, 2002, President George W. Bush signed the Terrorism Risk Insurance Act, one of the centerpieces of his agenda to revive the economy and mitigate the economic threat posed by terrorism. The Act was designed to address an alleged economic “crisis” caused by the unwillingness of insurers to issue terrorism insurance except on prohibitively expensive terms in the wake of the World Trade Center attacks. The Act’s proponents claimed that the unavailability of terrorism insurance not only left physical assets exposed or underinsured against terrorist acts, but also threatened to undermine the viability of capital projects that depended on access to terrorism insurance to secure bank loans. The Act’s solution to this problem was to create a temporary federal government reinsurance program lasting up to three years. This program will fund ninety percent of the costs, above increasing annual deductibles,

Federally Guaranteed Terrorism Insurance Needed

This article discusses how protecting the nation's energy infrastructure is a rising priority, in the aftermath of the September 11th terrorist attacks. It advocates the need for real, federally guaranteed terrorism insurance in industries that are extraordinarily sensitive to future attack and that insurers are therefore reluctant to cover, such as the water industry. The article describes a method of reducing insurance costs by establishing a government and private enterprise partnership to reduce liability by promoting risk reduction programs. Legislation can grant a discount on insurance premium rates or provide for favorable deductibles and also limit liability for eligible businesses that establish a terrorism loss prevention program.

CMBS: Moody's Approach to Terrorism Insurance for U.S. Commercial Real Estate

CMBS: Moody's Approach to Terrorism Insurance for U.S. Commercial Real Estate