Government Support for the Terrorism Insurance Industry: Where do We go from Here?

27 Pages Posted: 14 Sep 2008

See all articles by Thomas Russell

Thomas Russell

Santa Clara University - Department of Economics

Jeffrey E. Thomas

University of Missouri at Kansas City - School of Law

Date Written: August 2008

Abstract

Federal government support for the terrorism insurance industry has a very brief history. Prior to 9/11, insurers did not take terrorist-related losses into account when underwriting risks. The industry did not even conceive of an attack that could generate such significant losses. The dramatic shift in perception since then has caused many to suggest that terrorism risks are uninsurable. The notion that terrorism risk was uninsurable was part of the rationale advanced for government intervention. When the initial efforts at legislation failed, the industry began to withdraw from the market by adding exclusions for terrorism-related losses to their policies. Reinsurers were the first to adopt such exclusions and their withdrawal left the primary insurers at risk of insolvency in the event of a major terrorism loss. The fundamental problem of terrorism insurance is the impossibility of adequate capital following a large loss. When Congress decided that reduced availability of terrorism insurance was causing a drag on the U.S. economy, the Terrorism Risk Insurance Act (TRIA) was adopted. TRIA provides liquidity through government support to pay terrorism claims. This paper examines the essential features of the TRIA while asking how terrorism insurance could optimally be regulated. It concludes with the suggestion to extend to insurers of terrorism-related loss the same access to public capital as the Federal Reserve provides to banks in times of liquidity crises.

Keywords: Terror, Terrorism, Insurance, Insurers, September 11, Terrorism-related loss, Reinsurance, Terrorism Risk Insurance Act, TRIA, CNBR

JEL Classification: G20, G22, G28, H56, H81, K12, K23

Suggested Citation

Russell, Thomas and Thomas, Jeffrey E., Government Support for the Terrorism Insurance Industry: Where do We go from Here? (August 2008). Available at SSRN: https://ssrn.com/abstract=1267231 or http://dx.doi.org/10.2139/ssrn.1267231

Thomas Russell

Santa Clara University - Department of Economics ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-6953 (Phone)
408-554-2331 (Fax)

Jeffrey E. Thomas (Contact Author)

University of Missouri at Kansas City - School of Law ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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