DOC PREVIEW
INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES

This preview shows page 1-2-3-4-26-27-28-53-54-55-56 out of 56 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 56 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

OECD Task Force on Terrorism Insurance Insurability of (Mega)-Terrorism Risk: Challenges and Perspectives 1 INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES Report prepared for The OECD Task Force on Terrorism Insurance Organization for Economic Co-operation and Development, Paris Howard KUNREUTHER and Erwann MICHEL-KERJAN The Wharton School Center for Risk Management and Decision Processes Jon M. Huntsman Hall, Suite 500 3730 Walnut Street, Philadelphia, PA 19104-6340 United States March 25, 2004OECD Task Force on Terrorism Insurance Insurability of (Mega)-Terrorism Risk: Challenges and Perspectives 2 EXECUTIVE SUMMARY Catastrophic events present special challenges for economics and risk management since they have an immediate impact on a wide range of stakeholders, can have severe long-term economic and social consequences and are difficult to assess quantitatively. As these events normally have a low probability of occurrence, there are limited historical data on which to base estimates of the risks and there is considerable uncertainty associated with experts’ risk assessments. The terrorist attacks of September 11, 2001 are the most costly disaster in the history of insurance and have led both insurers and reinsurers to reevaluate under what conditions they can provide coverage against this risk. We examine the conditions for insurability of risks and conclude that terrorism presents special problems due to the uncertainty of the risk, the possibility of adverse selection and moral hazard as well as correlated losses between different lines of coverage. These factors may explain the unwillingness of private insurers in the United States to offer coverage following 9/11 and why the US Congress passed legislation that provides government protection against catastrophic terrorist losses. We argue that the special characteristics of terrorism compared with major natural hazards call for government participation in any terrorism insurance program. This need has been recognized by most countries through the creation of national programs for covering (mega)-terrorism. Since the creation of these programs, the level of demand for non-compulsory commercial terrorism coverage has remained low in countries such as the U.S. and Germany. The paper discusses some factors that explain this behavior. If the low level of demand continues, a large-scale terrorist attack will likely have a more devastating effect on business and social continuity today than after 9/11 because losses will not be diversified in the national and international insurance and reinsurance industry. This raises the question as to whether terrorism insurance should be mandatory and, if so, how would such a program be administered? The report discusses also the most recent developments in quantitative risk modeling. A wide range of stakeholders are likely to find these models useful for evaluating their exposure through alternative scenarios but they currently are not able to predict the likelihood of specific terrorist actions. We conclude that better data are needed to evaluate alternative public-private partnerships for encouraging risk reduction measures and providing insurance against terrorism.OECD Task Force on Terrorism Insurance Insurability of (Mega)-Terrorism Risk: Challenges and Perspectives 3TABLE OF CONTENTS EXECUTIVE SUMMARY………………………………………………………………..………….. 2 A. INTRODUCTION ……………………...…………………………………………………….…… 4 B. NEW FRONTIERS ………………………………………………………………………………... 5 B1. INSURING 9/11: A NEW LOSS DIMENSION ……………………………..…….……. 5 B2. EVIDENCE ON CHANGE IN THE NATURE OF TERRORISM RISK ………….….…... 9 C. INSURING EXTREME EVENTS: WHY IS TERRORISM DIFFERENT? …...……. 13 C1. INSURABILITY OF CATASTROPHE RISKS …………………………………………. 13 C2. DETERMINING WHETHER TO PROVIDE COVERAGE ……………………….…….. 19 C3. WHY IS TERRORISM DIFFERENT? ………………………………….…………….…. 21 D. COVERING MEGA-TERRORISM: THE NEED FOR PUBLIC-PRIVATE PARTNERSHIPS ………………………………………………………………………………… 26 D1. PRIVATE MARKET RESPONSES TO 9/11 ……………………………………….…. 26 D2. TERRORISM RISK COVERAGE: NEED FOR GOVERNMENT INTERVENTION .… 31 D3. A LOW DEGREE OF MARKET PENETRATION ……………………………..……. 36 E. MODELING TERRORISM RISK ……………………………………………………….…... 38 E1. TERRORISM HAZARD …………………………………………………………..…..… 40 E2. INVENTORY ………………………………………………………………………..…... 43 E3. VULNERABILITY ……………………………………………………………….…….. 43 E4. WORKERS’ COMPENSATION LOSS ………………………………………….…….. 45 E5. NATIONAL PROGRAMS OF RISK COVERAGE: THE USE OF TERRORISM MODELS ….……………………………………………… 47 F. CONCLUSION AND OPEN QUESTIONS ……………………………………………..…. 48 REFERENCES ………………………………………………………………………………..……….…… 50 APPENDIX …………………………………………………………………………………………….…… 55OECD Task Force on Terrorism Insurance Insurability of (Mega)-Terrorism Risk: Challenges and Perspectives 4A. INTRODUCTION Catastrophic events present special challenges for economics and risk management since they have an immediate impact on a wide range of stakeholders can have severe long-term economic and social consequences and are difficult to assess quantitatively. As these events normally have a low probability of occurrence, there are limited historical data on which to base estimates of the risks and there is considerable uncertainty associated with experts’ risk assessment estimates. An aversion to ambiguity leads insurers to set premiums much higher than they otherwise would if there was agreement among experts as to the likelihood and consequences of future events. (Kunreuther, Hogarth, and


INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES

Download INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view INSURABILITY OF (MEGA)-TERRORISM RISK: CHALLENGES AND PERSPECTIVES 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?