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Insuring Against Terrorism: The Policy Challenge

  • Kent Smetters

Terrorist attacks worldwide during the past several years have spurned an interest in understanding not only how governments can mitigate terrorism risk but also how governments might help finance future losses. This interest was buttressed by the seemingly failure of the private insurance market to provide coverage for terrorism losses after the attack on September 11, 2001. This paper surveys the evidence of the supposed private market failures after 9/11 and the arguments for government provision of terrorism insurance. The paper argues that mostly unfettered insurance and capital markets are capable of insuring large terrorism losses. If there is any "failure," it rests with government tax, accounting, and regulatory policies that have made it costly for insurers to hold surplus capital. Government policy has also hindered the implementation of instruments that could securitize the underlying risks. Correcting these policies would likely enable private insurers to cover both terrorism and war risks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11038.

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Date of creation: Jan 2005
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Publication status: published as Smetters, Kent. “Insuring Against Terrorism: the Policy Challenge.” Brookings-Wharton Papers on Financial Services, 2004.
Handle: RePEc:nbr:nberwo:11038
Note: PE
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  1. J. David Cummins & Christopher M. Lewis & Richard D. Phillips, 1998. "Pricing Excess-of-loss Reinsurance Contracts Against Catastrophic Loss," Center for Financial Institutions Working Papers 98-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. 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.
  3. Cummins, J David & Lewis, Christopher M, 2003. " Catastrophic Events, Parameter Uncertainty and the Breakdown of Implicit Long-Term Contracting: The Case of Terrorism Insurance," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 153-78, March-May.
  4. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, 1995. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," NBER Working Papers 5378, National Bureau of Economic Research, Inc.
  5. 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.
  6. S. Brock Blomberg & Gregory D. Hess & Athanasios Orphanides, 2004. "The Macroeconomic Consequences of Terrorism," CESifo Working Paper Series 1151, CESifo Group Munich.
  7. David F. Bradford & Kyle D. Logue, 1997. "The Influence of Income Tax Rules on Insurance Reserves," NBER Working Papers 5902, National Bureau of Economic Research, Inc.
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