Regulating The Market For Terrorism Insurance

Since the terrorist attacks of 9/11, interest in the impact of terrorism on the insurance industry has surged. Even with the catastrophic human losses and physical destruction, the attacks resulted in one of the most costly insurance events in American history. In the aftermath, an important public policy question arose as to whether, and how, the federal government should intervene to provide a temporary "Backstop" for property-casualty terrorism risk insurance. This paper presents a path towards correcting the moral hazard problem. Terrorism risk insurance can be used as a lever to motivate high-risk facilities to adopt risk-reducing precautionary measures through improvements in pricing accuracy and by linking terrorism risk insurance benefits to national preparedness goals.