Table of Contents

The Economic Costs and Consequences of Terrorism

The Economic Costs and Consequences of Terrorism

Edited by Harry W Richardson, Peter Gordon and James E. Moore II

This landmark book covers a range of issues concerning the consequences of terrorist attacks. Beginning with a discussion of new policies and strategies, it then delves into specific areas of concern, modeling a range of possible scenarios and ways to mitigate or pre-empt damages.

Chapter 3: An Empirical Analysis of the Terrorism Risk Insurance Act (TRIA)

Howard Kunreuther and Erwann Michel-Kerjan

Subjects: economics and finance, public sector economics, environment, disasters, politics and public policy, terrorism and security


* Howard Kunreuther and Erwann Michel-Kerjan SETTING THE STAGE Prior to 11 September 2001 terrorism exclusions in commercial property and casualty policies in the US insurance market were extremely rare (outside of ocean marine insurance) because losses from terrorism had historically been small and, to a large degree, uncorrelated. Attacks of a domestic origin were isolated, carried out by groups or individuals with disparate agendas. Thus the country did not face a concerted domestic terrorism threat, as did countries such as France, Israel, Spain and the UK. Even the first attack on the World Trade Center (WTC) in 19931 and the Oklahoma City bombing of 19952 were not seen as threatening enough for insurers to consider revising their view of terrorism as a peril worth considering when pricing a commercial insurance policy. Since insurers and reinsurers felt that the likelihood of a major terrorist loss was below their threshold level of concern, they did not pay close attention to their potential losses from terrorism in the United States (Kunreuther and Pauly, 2005).3 The terrorist attacks of 11 September 2001 killed over 3000 people from over 90 countries and injured about 2250 others. The attacks inflicted damage currently estimated at nearly $80 billion, about $32.4 billion of which was covered by about 120 insurers and reinsurers (Hartwig, 2004).4 Of the total insured losses, those associated with property damage and business interruption are estimated at $22.1 billion. Reinsurers (most of them European) were responsible for a large portion of the...

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