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Governments insure what insurers can't
The backstop for terrorism exists because the risk outgrew what private insurers could carry. The UK runs a government scheme for flood risk on the same logic: some losses are too large and too widespread for the market alone.
AI's systemic risks raise that question. A few labs hold concentrated risk, a single failure could spread widely, and nobody will underwrite a true tail event. Insurance people and tech people are looking at how to structure something that could cope with it.
Pressure is building on governments around the world to address the issue.
Why did 9/11 break terrorism insurance?
Insured losses from the September 11, 2001 attacks ran to tens of billions of dollars, among the largest in insurance history at that point. Reinsurers afterward pulled back from covering terrorism, and without that cover lenders and developers struggled to finance large buildings. Congress responded with the Terrorism Risk Insurance Act in 2002, under which the federal government shares losses above a threshold with insurers. The program was renewed in 2005, 2007, 2015, and 2019.
How does the UK flood scheme work?
Flood Re, launched in 2016, lets insurers pass the flood portion of a high-risk home policy to a shared pool at a price capped by the home's council tax band. The pool is funded by a levy on insurers rather than by the homeowner. Before it, many homes in flood-prone areas struggled to find affordable cover. The scheme is set to run until 2039.
Why can governments absorb catastrophes insurers can't?
A government can spread a loss across all taxpayers and over many years, which no private insurer can do. It can also borrow at lower rates than a private firm pays to raise capital. The same logic sits behind the Price-Anderson Act of 1957 in the United States, which caps nuclear plant operators' liability and sets up a pooled industry fund for larger accidents.
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