Report Urges Better Insurance Against Cost of Terror Attacks

Some of world's top economies still not financially prepared for a significant terror attack


PARIS -- Some of the world's most advanced economies remain ill-equipped to survive the fallout from a major terrorist atrocity, the OECD warned Tuesday, despite widespread efforts since the Sept. 11 attacks to spread insurance risk between public and private sectors.

"There are still significant gaps in coverage, which could be revealed by another large-scale attack," said the Organization for Economic Cooperation and Development, a Paris-based club of 30 industrialized countries, in a statement prepared to accompany publication of a report on terrorism risk insurance.

Almost four years after hijacked passenger jets slammed into the World Trade Center in New York and the Pentagon in Washington D.C., killing nearly 3,000 people and running up the world's biggest ever insurance bill, the calculation of such risks remains fraught with difficulties and the worst kinds of attack uninsurable, the 289-page study says.

While governments are rightly devoting attention to preventing further attacks, the report adds, "ensuring financial coverage of the terrorism risk, if prevention were to fail, is a no less important policy issue to mitigate the potentially devastating impacts of future attacks."

Faced with a shortfall of reasonably priced insurance, the United States, Australia, France, Germany and the Netherlands stepped in after the Sept. 11 attacks to offer last-resort government guarantees to their companies. Two other OECD countries, Britain and Spain, already had similar schemes in place before 2001.

But cover is still patchy even in some of the countries where it is most readily available, said Cecile Vignial-Denain of the OECD's financial markets division, who directed the study.

Only one half of U.S. corporations had taken out terror insurance by the end of last year, while in Germany the figure stands at less than three percent of eligible companies, Vignial-Denain said. "Germany has a very large exposure. A whole swathe of the economy is uninsured."

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 either.

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 US$250 billion (EUR 210 billion), or nearly eight times the US$32 billion bill (EUR 27 billion at today's rates) faced by insurers after Sept. 11.

"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 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. "A sustained market for such financial instruments to cover terrorism risks has not yet emerged."

Instead, 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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