The Federal Government as Insurer of Last Resort for Terrorism Risk

Abstract

Lawmakers recently reauthorized the federal program that provides insurance against the risk of terrorism. That program addresses the inherent difficulty of pricing rare, catastrophic risks; after a large attack, it would reduce demands for assistance and help stabilize the economy. It may also crowd out private reinsurance and dampen mitigation incentives. The Congressional Budget Office estimates that the program yields expected net budgetary savings, provided that the post-attack taxes—which would generally exceed federal outlays—are imposed on commercial policyholders as specified in current law. However, the government bears the risk of catastrophic losses and of ex post policy changes.