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Abstract

This paper investigates terrorism risk insurance in the United States as well as those programs offered in other countries throughout the world. In the United States, particular attention is devoted to the interaction of government with private insurers to maintain an effective insurance program. An analysis is performed comparing terrorism insurance before and after the attacks on the World Trade Center on September 11, 2001. The paper looks into actual terrorist events that have occurred focusing on 56 world-wide events that are associated with property losses greater than $10 million. This paper not only investigates the losses that were incurred but also the way the event was insured, and how the Terrorism Risk Insurance Act (TRIA) program could help the insurer in the event of catastrophic loss. Based on the 56 major events, a simulation is run in order to examine the losses and timing of potential future catastrophic events. Both property losses and the timing between events are simulated based on various distributions. For a variety of simulated events, the paper investigates how TRIA would pay out losses for the event as well as the effects that the event would have on the insurance industry. Rather than looking at the industry as a whole, particular attention will also be given to some of the top insurers for terrorism coverage. Using the findings from the data, the paper finally proposes changes to TRIA in order to create a better system of reinsurance for events with large losses.

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