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- Report n°3: Financial protection of critical infrastructure
Report n°3: Financial protection of critical infrastructure
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Table of contents
- Uncertainty and insurability of catastrophic risk : Why is terrorism different?
Uncertainty and insurability of catastrophic risk : Why is terrorism different?
A more advanced analysis of the characteristic features of terrorism as a potentially catastrophic risk provides better understanding of why the single argument of the extreme amount of insurance reimbursement connected to the September 11 events is not sufficient to explain insurers' reluctance to cover, on their own, this type of risk(22). Without any claim to exhaustivity, it is interesting to put forward certain fundamental characteristics which make large-scale terrorism a unique risk for the insurance and reinsurance industries, and why therefore it is unique also in terms of insurability.
What are the possible consequences of terrorist attacks? Is it possible to appraise them? What is the level of uncertainty associated to these scenarios? What risk information is available? To what degree is the risk endogenous? Who are the risk carriers? Does perception of the risk play a more prominent role than for other catastrophic events? How can financial coverage of terrorism and national security policies be linked? What are the respective responsibilities of governments and of the private sector?
This section provides some replies to these question and also shows why terrorism is different from many other catastrophic risks.
(22) In Michel-Kerjan (2003-b) we analyzed the reactions of the financial markets to the September 11 events, predicted mainly by the theoretical results of insurance economy. In particular, it is remarkable that after the immediate shock post 9/11, prices of insurance company shares rapidly regained the pre 9/11 levels, or even exceeded them. It is estimated that between September 10, 2001 and November 8, 2001, the stock market index of American insurance companies for property and casualty insurance increased by 6.5%, as compared to three times less for the S&P500 index.