The effects of government intervention on the market for corporate terrorism insurance |
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| Authors: | Erwann Michel-Kerjan Paul A Raschky |
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| Institution: | 1. Center for Risk Management, OPIM Dept., The Wharton School, University of Pennsylvania, Philadelphia, PA, 19104, USA;2. Department of Economics, Ecole Polytechnique, France;3. Department of Economics, Monash University, Caulfield East 3145, VIC, Australia;1. School of Business and Economics, University of Birmingham, Leicestershire LE11 3TU, UK;2. Business School, University of Aberdeen, Aberdeen AB24 3QY, UK;3. Department of Banking and Finance, Monash Business School, Monash University, Caulfield, VIC 3145, Australia;1. Faculty of Law, Economics and Management of Jendouba, University of Jendouba, Tunisia;2. Faculty of Business and Commerce, Keio University, Japan;1. Department of Political Economy, King''s College London, 22 Kingsway, Virginia Woolf Building, Strand Campus, London WC2B 6NR;2. Department of Economics, University of Perugia, Via A. Pascoli 20, 06123 Perugia, Italy;1. Degree of Political Science and Public Administration, National and Kapodistrian University of Athens. Postgraduate in International Relations, University of Democr itus, Greece;2. Department of Accountancy, Kavala Institute of Technology, Agios Loukas, Kavala, 65404, Greece |
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| 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 $100 billion. 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. |
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