Could the alternative risk transfer market provide a terrorism backstop?

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Terrorism is a notoriously difficult risk to cover. A U.S. federal terrorism backstop has been in place since 2002 to help the private insurance market provide cover for terrorism risks as they could not provide cover at levels or prices which were viable on their own.

Now industry groups such as RIMS are getting worried that the current version of the Terrorism Risk Insurance Act is slated to expire in 2014 and are calling on the U.S. government to confirm how they will extend or provide equivalent assistance to the insurance market.

RIMS believe that it would be highly unlikely that terrorism risk insurance would continue to be available at current coverage levels and prices if the government withdraws its support. This article from Business Insurance has more coverage.

We’d like to know what our readers think about this and whether you believe that alternative risk transfer mechanisms could provide assistance in setting up a backstop (or become the backstop)? Catastrophe bonds would be a possibility and it has been mooted for some time that cat bonds could be the answer to the terrorism cover problem. However Standard & Poor’s said back in May 2008 that they refuse to rate anything linked to terrorism risks which could make issuance difficult for private companies (maybe not for the government though).

The insurance-linked securities market is certainly mature enough to take on the task of providing terrorism cover. We understand that limitations in risk models may make quantifying the risks more difficult but are there other reasons why catastrophe bonds for terrorism risks can’t be issued?

What do you think? Let us know in the comments below.

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