Insuring Against Terrorism: The Policy Challenge

67 Pages Posted: 4 Feb 2005 Last revised: 31 Aug 2010

See all articles by Kent A. Smetters

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: January 2005

Abstract

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.

Suggested Citation

Smetters, Kent, Insuring Against Terrorism: The Policy Challenge (January 2005). NBER Working Paper No. w11038, Available at SSRN: https://ssrn.com/abstract=649727

Kent Smetters (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

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Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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