The role of insurance in managing extreme events: implications for terrorism coverage - Statistical Data Included

Business Economics, April, 2002 by Howard Kunreuther

Pool Re charges a separate, optional premium for terrorism coverage that is calculated as a percentage of the total fire and accident coverage. The premiums established by Pool Re are based on the risks, with the highest rates in Central London and the second highest in the rest of the city. This premium is collected by the primary insurer and passed on to Pool Re. If a claim is made which exhausts the premiums collected, each primary insurer faces a levy of up to ten percent of the premiums it has paid into the pool. If this amount cannot cover the cost of the claim, then the balance is met out of the public purse (CII Journal, 1993).

France: Following serious flooding in France at the end of 1981, the French government established a uniform surcharge on all private insurance contracts to pay for natural disasters, such as earthquakes and floods, that had been considered uninsurable by the private sector. These surcharges are transferred to private insurers who are responsible for paying compensation within three months after a disaster. Also, federal reinsurance is available from Caisse Centrale de Reassurance (CCR), a state-owned reinsurance company, to cover unusually large losses. The French government is the lender of last resort should CCR not have sufficient funds from its premiums to pay the losses (De Marcellis-Warin and Michel-Kerjan, 2002).

In January 2002, the French set up a pool with a state guarantee for terrorism coverage. Private insurers retain the first portion of losses. The next layer is placed in the international insurance and reinsurance market. A third layer is absorbed by the French government but the private insurance industry will be asked to pay back any amount falling into this layer over a ten-year period. The CCR covers any losses from terrorism that exceed the amounts covered by these first three layers (Swiss Re, 2002).

Israel: The government administers two programs for dealing with terrorism risk. The Israeli Income and Property Tax Commission levies a national property tax, predominantly on Israeli business. The commission pays for claims on property damages from a terrorist attack, but indirect damages (including business interruption) must be covered by private insurance. The second government program, administered by the National Insurance Institute, provides for medical care, lost wages, payments to the families of attack victims, and personal injury. Coverage also extends to visitors and tourists in the country (General Accounting Office, 2001).

A Proposed Program for the United States (l6)

Given the limited availability of terrorism coverage from the private sector and the role that the public sector plays in providing protection in other countries, there appears to be an opportunity to develop some type of public-private partnership in the United States. The challenge is to develop an efficient program that can satisfy the different interested parties, each of who has its own set of values and concerns.

One also needs to consider the importance of providing protection prior to an event so as to reduce the need for the public sector to provide financial aid following a disaster due to political pressure. Federal funding provided to the airlines after September 11th points to the need for preventive actions now rather than waiting until after the next catastrophe.