TY - JOUR AU - Kunreuther,Howard AU - Michel-Kerjan,Erwann AU - Porter,Beverly TI - Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism JF - National Bureau of Economic Research Working Paper Series VL - No. 10179 PY - 2003 Y2 - December 2003 UR - http://www.nber.org/papers/w10179 L1 - http://www.nber.org/papers/w10179.pdf N1 - Author contact info: Howard Kunreuther Operations and Information Management The Wharton School University of Pennsylvania 3730 Walnut Street, 500 JMHH Philadelphia, PA 19104-6366 Tel: 215/898-4589 Fax: 215/573-2130 E-Mail: kunreuther@wharton.upenn.edu Erwann Michel-Kerjan The Wharton School University of Pennsylvania Center for Risk Management 3730 Walnut Street, 556 JMHH Philadelphia, PA 19104-6340 Tel: 215-573-0515 Fax: 215-573-2130 E-Mail: erwannmk@wharton.upenn.edu AB - This paper discusses new challenges we face with terrorism as a catastrophic risk by focusing on risk assessment, risk management as well as risk financing issues. The special characteristics of terrorism compared with major natural hazards call for the development of public-private partnerships, as recognized in November 2002 when the Terrorism Risk Insurance Act of 2002 (TRIA) was passed. This paper shows, however, that the temporary insurance system established by TRIA is neither a complete answer nor a definitive one. It raises fundamental questions for U.S. insurers as to how they will estimate the risk in order to set premiums for terrorist coverage that they now must offer to their clients. We discuss some of the most recent developments of terrorism models for helping insurers and reinsurers assess the premiums they should charge and how much coverage they can assume as well as for firms to better understand their exposure. Since the passage of TRIA, the current level of demand for insurance coverage has remained low and we discuss some factors that may contribute to it. After presenting alternative foreign public-private partnerships and discussing the potential role for terrorist catastrophe bonds, we provide some features of a more sustainable program for terrorism insurance in the U.S. after December 31, 2005. ER -