Terrorism Risk Financing
Terrorism risk poses fundamental challenges to our national security which must be seen in a dynamic perspective as the threat is continuously evolving. One of these challenges is associated with terrorism insurance coverage.
The 9/11 attacks inflicted $35 billion in insured losses, making 2001 the most costly year in the history of insurance and reinsurance up to that point. These attacks also revealed the new nature of the terrorism threat, where businesses and citizens have become the prime target of terrorist groups seeking to inflict major economic disruption and mass casualties.
Careful research and policy development are needed in the current debate on the future of terrorism insurance to assure economic and social continuity in the case of new terrorist attacks in the U.S.
The goal of the Wharton Risk Center research on terrorism risk financing is to provide policymakers, key industry decision makers and other interested parties with a continuous analysis of the question of what roles the public and private sectors can and should play with respect to terrorism risk coverage in the United States and abroad in the post-9/11 world.
Research Project Title: Financing the Economic Consequences of Terrorist Attacks
PI/Project Contact:
Howard Kunreuther and Erwann Michel-Kerjan
Other faculty involved:
Neil Doherty
Scott Harrington
Paul Kleindorfer
Mark Pauly
Irv Rosenthal
Peter Schmeidler
Project description:
Our work on terrorism risk insurance builds on research undertaken by the Wharton Risk Center over the past 5 years coupled with the 20 years of experience the Center has had in undertaking research on managing and financing low- probability/high-consequence events.
At the end of 2002, Congress passed the Terrorism Risk Insurance Act (TRIA) as a temporary measure to increase the availability of risk coverage for terrorist acts. TRIA is based on risk sharing between the insurance industry and the federal government.
In August 2005, the Risk Center issued its report, TRIA and Beyond, which constitutes one of the most extensive studies ever published on terrorism risk financing in the United States. The Wharton team has had fruitful meetings and discussions with key players on the issues associated with terrorism insurance and its relationship to other strategies for reducing and managing this risk.
The study concluded that there was a role and responsibility for government in collaboration with the private sector to provide protection against terrorism losses, and cautiously favored a temporary extension of TRIA, subject to specific modifications in its design. We also urged that Congress or the White House establish a national commission on terrorism risk coverage before permanent legislation is enacted. In December 2005, a two-year extension of TRIA was voted by Congress and signed by the President.
As part of ongoing collaboration with the Organization for Economic Cooperation and Development (OECD; comprised of the 30 highest-income countries), Kureuther and Michel-Kerjan served as experts for the OECD Task Force on Terrorism Insurance between 2003 and 2005, which also provides us with an international perspective on this complex subject.
Although the U.S. has been successful since 9/11 in preventing terrorist attacks on its own soil, the impact to the economy of another mega-attack or series of coordinated attacks seriously concerns the government, the private sector and citizenry. It is not clear, however, that the question of who should pay for the economic consequences of a terrorist attack on the U.S. has yet received the attention it deserves. We continue to work on this important issue.
Recent publications:
"Managing and Financing Extreme Events Project Snapshot," Fall 2007
"Evaluating the Effectiveness of Terrorism Risk Financing Solutions," September 2007
"How Does the Corporate World Cope with Mega-Terrorism? Puzzling Evidence from Terrorism Insurance Markets," Erwann Michel-Kerjan and Burkhard Pedell, Journal of Applied Corporate Finance, Vol. 18, Number 4, Fall 2006
"TRIA and Beyond," Wharton Risk Center Monograph, August, 2005 (Executive Summary available here)
"Terrorism Risk Coverage in the Post- 9/11 Era: A Comparison of New Public-Private Partnerships in France, Germany and the U.S.," Erwann Michel-Kerjan and Burkhard Pedell, Geneva Papers on Risk and Insurance, 2005.
"Policy watch: Challenges for Terrorism Insurance in The United States," Howard Kunreuther and Erwann Michel-Kerjan, Journal of Economic Perspectives, Fall 2004.