Insurers Can Recalculate Terrorism Risk

Much has been said and written about terrorism risk and its unsuitability for the risk-transfer mechanism of insurance. We have heard about the difficulty in calculating the size and probability of terrorism events, and the extreme catastrophic potential of an attack, such as the explosion of a nuclear device in an urban area.

But there is one aspect of the risk that in itself could make terrorism cheaper to insure than many other risks, all other factors being equal. This aspect is the fact that under certain scenarios, terrorism risk events can be viewed as highly negatively correlated. This means that they have a lower capital charge to insurers and reinsurers than most other risks.

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