Terrorism and the Insurance Industry

The threat of terrorism has thrown all traditional pictures of risk out the window – bad news for insurers, who are in the business of trying to predict, plan and price the cost of risks. Because it is absolutely impossible to predict incidents of terrorism and the losses they will cause, there is no way to price the cost of insuring against such losses. In light of this reality, certain industry-wide changes had to be made.

New exclusions

There have been some changes in the way insurance applies to acts of terrorism. Terrorism is no longer covered by any homeowners insurance policy. Your home insurance will not pay any claims for damages or injuries caused as a direct result of a terrorist act. Insurers just do not provide this protection. (There is a small amount of terrorism insurance available for some commercial risks.)

Why exclusions?

Remember how insurance works? If insurers can’t reasonably predict when and where a terrorist event might happen and how much it might cost, then it will be almost impossible to accurately factor such an event into the cost of insurance. To ensure that all claims could be paid, insurers would have to base their calculations of premiums on the absolute maximum they would expect to have to pay out. Because insurance is a pool, everyone would be paying these costs, even if it were unlikely that that they would have to make a claim.

Working with the federal government

In a number of other countries, governments have developed solutions to this gap in protection. This has not happened in Canada. The insurance industry is working with the federal government to raise awareness of, and find solutions to, this lack of coverage for consumers and businesses.