Terrorism and Insurance Markets: A Role for the Government as Insurer

Since September 11, 2001, insurance markets have been struggling to adjust to new information about the magnitude of risks posed by terrorism, and to the loss of tens of billions of dollars in reserves because of claims relating to the September 11 attacks. Insurance coverage for terror-related losses has become more expensive and for some risks difficult or impossible to obtain. As a result, various interest groups have called for the Federal government to provide coverage for terrorism losses, and proposals for increased government involvement are moving forward in Washington. We question the wisdom of any further measures of this sort. They are likely to come too late to address short-term market disruption, and in the long run may well supplant or distort desirable market responses to the new information about terrorism risk.