Terrorism Risk is Prime Example
INDIANAPOLIS (June 21, 2005)—Even in a robust private insurance market, certain types of “extreme” risk can only be insured with government assistance, according to a National Association of Mutual Insurance Companies (NAMIC) Issue Analysis entitled “Insuring the Uninsurable: Private Insurance Markets and Government Intervention in Cases of Extreme Risk.” Within this narrow category, no risk is more problematic than that associated with terrorism, observes author Sophie Korczyk, Ph.D. Indeed, terrorism combines the potential loss magnitude of a large-scale natural disaster with the unpredictability of a single intentional act. “This feature itself may make terrorism an inherently uninsurable risk,” Korczyk concludes.
Because it identifies the conditions that must be present for private insurance markets to function—and demonstrates the absence of those conditions with respect to terrorism risk—the monograph has direct relevance to the ongoing congressional debate over legislation to extend the Terrorism Risk Insurance Act (TRIA) for two more years. The Act is scheduled to expire at the end of 2005.
“Some have suggested that TRIA’s nonrenewal would have the salutary effect of causing insurers and commercial property owners to invest in protective measures that would mitigate terrorism risk,” said NAMIC Public Policy Director Robert Detlefsen. “But even if sophisticated terrorism protection measures could be developed and put in place, there is no guarantee they would be effective. Unlike hurricanes and earthquakes, terrorists can respond to changes in the environment by altering their tactics and selecting more vulnerable targets.”
Nevertheless, property owners, primary insurers, reinsurers, and government policymakers should continue to search for possible alternatives to the government reinsurance program established under TRIA. “In the end, however, some form of government-funded terrorism insurance—perhaps in concert with private sector initiatives such as catastrophic terrorism bonds, tax deferred reserves dedicated exclusively to terrorism loss indemnification, and terrorism risk pooling arrangements—will be necessary to provide Americans with effective and affordable coverage for this most extraordinary risk,” said Detlefsen.
“Insuring the Uninsurable: Private Insurance Markets and Government Intervention in Cases of Extreme Risk” can be downloaded from NAMIC Online.
Posted: Tuesday, June 21, 2005 12:00:00 AM. Modified: Tuesday, June 21, 2005 4:54:29 PM.
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