How Does the Corporate World Cope with Mega‐Terrorism? Puzzling Evidence from Terrorism Insurance Markets

Erwann Michel‐Kerjan and Burkhard Pedell
Authors registered in the RePEc Author Service: Erwann Michel-Kerjan

Journal of Applied Corporate Finance, 2006, vol. 18, issue 4, 61-75

Abstract: Terrorist attacks that have succeeded abroad since 2001, as well as others that were prevented, indicate that the threat of a large‐scale attack is real and will be with us for a long time. Focusing on the United States, the United Kingdom, and Germany, this article analyzes the role that insurance can play in providing commercial enterprises with financial protection against the economic consequences of major terrorist attacks. The article begins by explaining the design and key features of terrorism insurance programs operating today in each of the three countries (TRIA in the U.S., Pool Re in the U.K., and Extremus in Germany). The authors then provide a detailed comparative analysis of the evolution of prices and take‐up rates (based on as yet unpublished data), with particular attention to financial institutions. For those who think the U.S. is the most likely target for mega‐terrorism, the findings are somewhat puzzling. On average, for example, companies in the U.S. do not pay even half as much for comparable coverage under TRIA as companies pay in Germany under Extremus, which raises the questions: Is terrorism coverage under the U.S. insurance program now drastically underpriced? If so, what would be the likely consequences of another large‐scale attack in the U.S.? On the demand side, the authors observe a dramatic increase in take‐up rates in the U.S. since 2003, revealing increased corporate concern. By contrast, the market penetration in Germany remains remarkably low. A better understanding of these programs and of the recent evolution of terrorism insurance markets in the U.S. and Europe should help corporate and government decision makers develop more effective protection against the economic consequences of mega‐terrorism.

Date: 2006
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Citations: View citations in EconPapers (8)

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https://doi.org/10.1111/j.1745-6622.2006.00112.x

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Working Paper: How Does the Corporate World Cope with Mega-Terrorism? Puzzling Evidence from Terrorism Insurance Markets (2007)
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