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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?
- Lack of historical data and non-informational symmetry
- Uncertainty and insurability of catastrophic risk : Why is terrorism different?
Lack of historical data and non-informational symmetry
Unlike other risks for which a considerable mass of historical data is in the public domain (floods, earthquakes, etc.), the data available to the public on acts of terrorism is limited. This is a result both of the fluctuating nature of the risk itself so that extrapolation from historical data is difficult (see next paragraph), and of the fact that for obvious reasons pertaining to national security, insurance companies do not have access to data collected by government intelligence.
As we have emphasized in recent articles, the nature of available information on possible new attacks is entirely original and therefore deserves special attention in order to elaborate public policies or market strategies for insurers and reinsurers. How is it original? Traditionally, public intervention into the insurance market was justified partly by market failures (in particular, anti-selection due to asymmetric information between insurers and the insured). In the case of terrorist risk, the problem would be better described by saying that there is a symmetry of non information between insurers and insured as regards the risks incurred that need to be covered. Neither insurers nor insured have any reliable information on these risks. In fact any asymmetry of information is between the government and the insurance companies covering the risks, particularly because of the work done by intelligence, espionage and counter-espionage departments and inter-governmental cooperation in fighting terrorism. However, for national security reasons, such information is not made public. The problem of ex ante asymmetry of information, as observed in the traditional relationship between insurers and the insured, does not arise for the risk of mass terrorism(25)(Michel-Kerjan, 2003).
(25) In the relationship between insurers and the insured for coverage against terrorist attacks, any morality issue would be essentially ex post.