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

Today, nine OECD countries have national terrorism insurance programs based on some type of public-private risk sharing. While such arrangements helped provide the necessary insurance capacity in the post-September 11, 2001 era, little is known about the impact of such governmental intervention in 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 propose 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. JEL classification: D21 (Firm Behavior); G22 (Insurance; Insurance Companies); H56 (National Security and War)