Supply and Demand for Terrorism Insurance:Lessons from Germany

In our article we consider insurance as a means of allocating terrorism risk. Terrorism poses asignificant challenge for insurers worldwide. In terms of possible losses it fits into the samecategory as earthquakes and hurricanes. Yet as a result of the uncertainty surrounding theserisks private markets face significant difficulties in providing insurance for it. In the insuranceindustry costly risk bearing can explain the supply of capacity risks. Corporate riskmanagement theory provides reasons why transaction costs can motivate firms to purchaseinsurance. In the context of these tightly connected theories we derive models for both thesupply of terrorism reinsurance and the demand for terrorism insurance.[...]