Federal Terrorism Risk Insurance

The terrorist attacks of September 11, 2001 represented a loss for commercial property & casualty insurers that was both unprecedented and unanticipated. After sustaining this record capital loss, the availability of adequate private insurance coverage against future terrorist attacks came into question. Concern over the potential adverse consequences of the lack of availability of insurance against terrorist incidents led to calls for federal intervention in insurance markets. This paper discusses the economic rationale for and against federal intervention in the market, and concludes that the benefits from establishing a temporary transition program, during which the private sector can build capacity and adapt to a dramatically changed environment for terrorism risk, may provide benefits to the economy that exceed the direct and indirect costs.