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The Actuary The magazine of the Institute & Faculty of Actuaries

Terrorism insurance shortfalls

Nearly four years after the 11 September terrorist acts that hit the US – the most costly disaster ever for the insurance industry – conditions on terrorism insurance markets have improved. Yet according to a new OECD report (www.oecd.org), there are continuing shortfalls in coverage, which could be revealed by another large-scale attack.

‘Terrorism Risk Insurance in OECD Countries’ examines market evolutions since 2001, as well as industry and government initiatives to address the challenge of modern terrorism compensation. One of its main conclusions is that private markets are not yet able to fully cover the extremely large losses that could result from terrorist acts in the future.

The report draws attention to major pending concerns:

  • Terrorism insurance take-up rates remain low in various countries (at end of 2004, only about half of companies were insured in the US, while less than 3% of eligible firms have contracted with the German compensation scheme). Under these circumstances, the economic and social impact of a new large-scale attack could be greater than in 2001. OECD countries concerned should develop risk awareness and could consider incentives to extend coverage and increase the financial capacity of terrorism risk compensation mechanisms.
  • Chemical, biological, radiological, and nuclear terrorism risks (CBRN) are generally excluded from insurance coverage and are not always fully covered through existing government-backed insurance schemes. Governments should work with the insurance industry to find sustainable solutions for coverage.
  • Estimates on maximum losses resulting from a single terrorist attack range from $50bn to $250bn. The losses associated with very large-scale terrorist attacks can remain beyond the capability of the private insurance and reinsurance industry to price and to absorb alone.
  • Mega-terrorism may even result, in some countries, in losses exceeding the joint compensation capacity of private markets and governments to compensate for them without threatening national economic stability. Ex-ante co-operation between interested countries may thus be considered in the future.

Appearing just two days before the London bombing tragedy, the OECD report appeared likely to be used by the US insurance industry to resist moves to reduce government support these.