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Tuesday, July 05, 2005

Insuring Against Terror

The OECD has a 289 page report out today on this difficult but important topic. Unfortunately, as Condoleeza Rice (who I'm not normally in the habit of quoting) says, we have to get it right every day, they only have to get it right once. The impact of a hit from what the OECD terms "mega terrorism" would be enormous. Apart from the human tragedy, and hard as it is to think about these matters, it would be important to contain the knock-on financial consequences.

The report also cautions that insurance policies generally exclude the worst kind of scenario -- in which a chemical or nerve agent, nuclear device or radiation-spewing "dirty bomb" is used to attack a major city -- and government guarantees often don't provide adequate cover.

Even if they did, smaller states could be bankrupted by such a "mega-terrorist attack" -- which the OECD said could incur losses of up to $250 billion, or nearly eight times the $32 billion bill insurers faced after the 2001 attack.

"In some smaller countries, or countries with smaller insurance markets, even if the state came to the rescue it would find it difficult to cover those risks without endangering the stability of its entire economy," Vignial-Denain (of the OECD's financial markets division, which directed the study) said.

Post-September 11 predictions that financial markets would meet the insurance shortfall with new "terrorism bonds" and other risk-spreading products have proven overly optimistic, the OECD report says.

The report suggests that international risk-sharing agreements may be needed along the lines of existing conventions on nuclear disasters -- committing member countries to help meet cleanup and compensation costs for each others' plant accidents -- but concludes that there is not enough political will for a far-reaching deal on terror risk.

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