Known Unknowns: The Illusion of Terrorism Insurance
62 Pages Posted: 4 Jul 2007
The September 11 terrorist attacks shifted the risk category of international terrorism in the United States from a risk ignored to a risk apparent. Before the attacks, the risk was "silent," either so unlikely as to be ignored by both insurer and insured, or so incalculable as to be outside of the realm of insurable risks. After the attacks, the expectation of international terrorism on American soil changed dramatically; unfortunately, the sudden awareness of a risk does not automatically trigger the sudden insurability of that risk. After September 11, insurers were quick to reassure the public that the industry could pay for the largest insured loss in history. Nearly as quickly, insurers began preparations to exclude future terrorism attacks from coverage. As the states began approving the use of these policy exclusions, Congress enacted a program barring terrorism exclusions, in exchange for federal funds for catastrophic losses.
Today, commercial insurers must either offer terrorism insurance, or leave the market. This Article makes two contentions. These are, in short, that the American terrorism risk is not covered today, and cannot be covered tomorrow. First, a significant percentage of losses from future terrorist attacks will not be covered under existing policy language, with or without the addition of a terrorism exclusion. Numerous other exclusions, common to commercial policies, bar losses from most potential forms of terrorist attack. These include losses from nuclear bombs, radiation from dirty bombs, and chemical or biological attacks. In this way, the terrorism risk is scantily clad, barely covering more than ordinary explosive damage. Second, in the absence of meaningful actuarial data on the risk of international terrorism in the United States, insurance coverage is not possible. This article explores why.
Keywords: insurance, terrorism insurance, terrorism,
JEL Classification: K00, K12, K39, G22
Suggested Citation: Suggested Citation