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By Root 921 0

zoning restrictions to prevent people from putting valuable property at unnecessary risk and require insurance for people in disaster-prone areas so that they would be forced to have some coverage for the financial risks. Special accommodations would be made for those with low income, similar to those provided to the elderly poor by current programs of income assistance. The Kunreuther-Pauly strategy recognizes the failures of private decisions; it also recognizes the likely societal willingness to provide assistance to victims of disasters, even though the severity of the consequences is due to their own inadequate self-protection and underinsurance. If this policy strategy is adopted, it might compel people to internalize the disaster costs imposed by their choices—thereby influencing, in a socially efficient manner, longer-term decisions regarding the location of businesses and homes.

Risk-rated insurance and regulation proposals such as these work best in situations where we have substantial historical data, making it possible to distinguish the risk levels and differences in risk by locale. For other disasters, however, this is not feasible. The risks from mega-terrorism posed by events such as the 9/11 attacks are low-probability events that pose even greater challenges for rational choice than that posed by natural disaster risks. The single concentrated cluster of events associated with the 9/11 attack provides little basis for assessing the likely frequency of such attacks in the future or where they might occur. The risks themselves are dimly understood, involving considerable uncertainty and highly diffuse probability judgments. Research indicates an extremely wide range of assessed risks following the 9/11 attack. In a survey Richard Zeckhauser and I undertook after 9/11, the mean value of respondents’ percentiles for the expected number of deaths due to terrorism in the next year was 33 at the 5th percentile, 404 at the median, and 35,200 at the 95th percentile—a very wide range indeed.6 The actual number of terrorism deaths in 2002 from attacks in the United States was zero, though 27 U.S. citizens were killed in anti-U.S. terrorist attacks in other countries.7 Although the analytical issues pertaining to terrorism risk insurance share many commonalities with natural disasters, they pose considerably greater obstacles for individuals and insurance firms.

Moreover, post-disaster compensation may become a potentially recurring policy issue for terrorist attacks just as it is for natural disasters. After 9/11, the government-funded compensation effort provided income support for the families of the deceased and limited the liability claims and costs imposed on the affected airlines and other businesses. In some respects, such post-disaster relief parallels the assistance efforts that are undertaken for victims of natural disasters. However, perhaps because of the novel circumstances of the 9/11 attacks, the government-provided aid was even more generous than that provided to victims of Hurricane Katrina and other natural disasters. Whether very generous post-disaster assistance will be forthcoming for future terrorist attacks will depend on the frequency of terrorist attacks, whether the victims engaged in behavior that put them at risk, the cost of compensation, and the public’s general concern with the welfare of those who have suffered the losses.

These less well anticipated disasters will pose problems that neither individual decisions nor insurance markets can address in a fully reliable manner. Even government policies may fall short. Understanding the sources of the failures and the likely departures from full economic rationality will continue to be a pivotal prerequisite for addressing the consequences of such disasters. The lessons learned from the literature on protection from natural disasters provide substantial guidance and cautionary warnings with respect to the ability of people to make the even more difficult decisions involving terrorism risks. There is no reason to believe that people will