Insuring against Terrorism: The policy challenge

The terrorist attacks during the past decade in London, Israel, the United States and elsewhere have spurned an interest in understanding not only how governments can mitigate terrorism risk but also how governments might help finance future losses. A burgeoning academic literature – and, not surprisingly, an intense lobbying effort by various industries -- has argued that government assistance is needed due to a host of problems: The large size of potential losses; the difficulty of pricing the losses; the government’s already-existing role as the guarantor of last resort; asymmetric information; the relationship between terrorism losses and government military policies; and other reasons. These arguments served as an important catalyst for the Terrorism Risk Insurance Act (TRIA) that President Bush signed into law in November, 2002. Although TRIA’s passage was held up in Congress for almost a year over a debate on limiting tort actions, TRIA was supported by Democratic and Republican leaders.