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Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism

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  • Howard Kunreuther
  • Erwann Michel-Kerjan
  • Beverly Porter

Abstract

This paper discusses new challenges we face with terrorism as a catastrophic risk by focusing on risk assessment, risk management as well as risk financing issues. The special characteristics of terrorism compared with major natural hazards call for the development of public-private partnerships, as recognized in November 2002 when the Terrorism Risk Insurance Act of 2002 (TRIA) was passed. This paper shows, however, that the temporary insurance system established by TRIA is neither a complete answer nor a definitive one. It raises fundamental questions for U.S. insurers as to how they will estimate the risk in order to set premiums for terrorist coverage that they now must offer to their clients. We discuss some of the most recent developments of terrorism models for helping insurers and reinsurers assess the premiums they should charge and how much coverage they can assume as well as for firms to better understand their exposure. Since the passage of TRIA, the current level of demand for insurance coverage has remained low and we discuss some factors that may contribute to it. After presenting alternative foreign public-private partnerships and discussing the potential role for terrorist catastrophe bonds, we provide some features of a more sustainable program for terrorism insurance in the U.S. after December 31, 2005.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10179.

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Date of creation: Dec 2003
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Handle: RePEc:nbr:nberwo:10179

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References

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  1. Enders, Walter & Sandler, Todd, 2000. "Is Transnational Terrorism Becoming More Threatening? A Time-Series Investigation," Staff General Research Papers 1823, Iowa State University, Department of Economics.
  2. Erwann Michel-Kerjan & Burkhard Pedell, 2005. "Terrorism Risk Coverage in the Post-9/11 Era: A Comparison of New Public–Private Partnerships in France, Germany and the U.S.*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 30(1), pages 144-170, January.
  3. Cauley, Jon & Im, Eric Iksoon, 1988. "Intervention Policy Analysis of Skyjackings and Other Terrorist Incidents," American Economic Review, American Economic Association, vol. 78(2), pages 27-31, May.
  4. Erwann Michel-Kerjan, 2003. "New Challenges in Critical Infrastructures : A US Perspective," Working Papers hal-00242947, HAL.
  5. Brown, Jeffrey R. & Kroszner, Randall S. & Jenn, Brian H., 2002. "Federal Terrorism Risk Insurance," National Tax Journal, National Tax Association, vol. 55(3), pages 647-57, September.
  6. Eeckhoudt, L. & Gollier, C., 1996. "The Insurance of Low Probability Events," Papers 976.423, Toulouse - GREMAQ.
  7. J. David Cummins & Neil A. Doherty & Anita Lo, 1999. "Can Insurers Pay for the "Big One"? Measuring the Capacity of an Insurance Market to Respond to Catastrophic Losses," Center for Financial Institutions Working Papers 98-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
  8. Keohane, Nathaniel O & Zeckhauser, Richard J, 2003. " The Ecology of Terror Defense," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 201-29, March-May.
  9. Sandler, Todd & Enders, Walter, 2004. "An economic perspective on transnational terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 301-316, June.
  10. Geoffrey Heal & Howard Kunreuther, 2003. "You Only Die Once: Managing Discrete Interdependent Risks," NBER Working Papers 9885, National Bureau of Economic Research, Inc.
  11. Kunreuther, Howard & Heal, Geoffrey, 2003. " Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-49, March-May.
  12. Patrick Lenain & Marcos Bonturi & Vincent Koen, 2002. "The Economic Consequences of Terrorism," OECD Economics Department Working Papers 334, OECD Publishing.
  13. Cummins, J. David & Doherty, Neil & Lo, Anita, 2002. "Can insurers pay for the "big one"? Measuring the capacity of the insurance market to respond to catastrophic losses," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 557-583, March.
  14. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
  15. Manuel Trajtenberg, 2003. "Defense R&D Policy in the Anti-terrorist Era," NBER Working Papers 9725, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2007. "Calculating Tragedy: Assessing The Costs Of Terrorism," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 1-24, 02.
  2. Nathalie De Marcelis-Warin & Erwann Michel-Kerjan, 2003. "Catastrophe risk sharing and public-private partnerships : From natural disasters to terrorism," Working Papers hal-00242981, HAL.
  3. Thomann, Christian & Pascalau, Razvan & Schulenburg, J.-Matthias Graf von der & Gas, Bruno, 2007. "Corporate Management of Highly Dynamic Risks: The Case of Terrorism Insurance in Germany," MPRA Paper 7221, University Library of Munich, Germany.
  4. Siqueira, Kevin & Sandler, Todd, 2007. "Terrorist backlash, terrorism mitigation, and policy delegation," Journal of Public Economics, Elsevier, vol. 91(9), pages 1800-1815, September.
  5. Karolyi, G. Andrew, 2006. "The Consequences of Terrorism for Financial Markets: What Do We Know?," Working Paper Series 2006-6, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  6. Tilman Brück, 2004. "An Economic Analysis of Security Policies," HiCN Working Papers 06, Households in Conflict Network.
  7. Erwann Michel-Kerjan, 2004. "Terrorisme à grande échelle : partage de risques et politiques publiques," Working Papers hal-00242918, HAL.
  8. Khusrav Gaibulloev & Todd Sandler & Donggyu Sul, . "Reevaluating Terrorism and Economic Growth: Dynamic Panel Analysis and Cross-Sectional Dependence," Economics Working Papers 02-03/2013, School of Business Administration, American University of Sharjah.
  9. Czinkota, Michael R. & Knight, Gary A. & Liesch, Peter W. & Steen, John, 2005. "Positioning terrorism in management and marketing: Research propositions," Journal of International Management, Elsevier, vol. 11(4), pages 581-604, December.
  10. Bruno Gas, 2005. "Wege zur Versicherung des Terrorrisikos," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(4), pages 471-498, November.
  11. Khusrav Gaibulloev & Todd Sandler, 2008. "The Impact of Terrorism and Conflicts on Growth in Asia, 1970–2004," Working Papers id:1789, eSocialSciences.

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