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The effects of government intervention on the market for corporate terrorism insurance

Author

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  • Michel-Kerjan, Erwann
  • Raschky, Paul A.
Abstract
Nine OECD countries presently have national terrorism insurance programs based on some type of public–private risk sharing. While such arrangements have helped provide the necessary insurance capacity in the post-September 11, 2001 era, little is known about the effect of such governmental intervention on terrorism insurance markets. This paper focuses on the United States, where the Terrorism Risk Insurance Act of 2002 (TRIA) provides insurers with no cost federal reinsurance up to an industry-wide loss of $100billion. We present an empirical analysis to compare how insurers' diversification behavior varies between property coverage (no governmental intervention) and terrorism coverage (with government intervention). We find evidence that insurers in the U.S. are much less diversified for terrorism coverage than they are for property lines of coverage. We interpret these findings as tentative evidence for moral hazard caused by the governmental intervention under TRIA.

Suggested Citation

  • Michel-Kerjan, Erwann & Raschky, Paul A., 2011. "The effects of government intervention on the market for corporate terrorism insurance," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 122-132.
    • Handle: RePEc:eee:poleco:v:27:y:2011:i:s1:p:s122-s132
    DOI: 10.1016/j.ejpoleco.2011.03.006
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    References listed on IDEAS

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    3. Najam, Najam Ul Sabeeh & Mehmood, Arshad Mehmood, 2019. "The economic cost of terrorism and natural disasters: A deeper analysis of the financial market markets of Pakistan," MPRA Paper 92278, University Library of Munich, Germany.

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    More about this item

    Keywords

    Terrorism; Economics of national security; Government intervention; Commercial insurance markets;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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