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

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.

Research highlights► We study the effect of TRIA on insurers' diversification behavior for terrorism lines in the United States. ► Policy-level demand and supply data for terrorism and property coverage are compiled from a unique database of hundreds of commercial firms. ► Government intervention indeed reduces insurer's portfolio diversification. ► Government intervention also reduces effect of liquidity concerns in supply decision.