Terrorism Insurance Policy and the Public Good

The technical difficulties involved with assessing and pricing terrorism risk are similar to those associated with assessing and pricing natural disaster risk. Like other catastrophe risks (such as those associated with natural disasters), terrorism risk is both difficult to price and difficult to diversify. However, the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA) marked a departure from existing federal catastrophe insurance market policy in several respects. Indeed, a key difference between terrorism and natural disaster risk is that terrorism is manmade. Neighboring small businesses may enjoy a decrease in terrorism risk, since they are no longer exposed to damage resulting from an attack on the trophy building. A skyscraper in Manhattan may well be a desirable target for terrorists. Similar concerns may be present with federal assistance in the case of terrorism risk, but there is also the problem of terrorism causing excessive risk-avoiding behavior. While the comparison of terrorism risk with natural disaster risk is suitable as a starting point, it is clear that there are unique issues associated with terrorism and, in particular, an economically complex interaction between public policy and private behavior.