Insurance coverage against terrorism remains insufficient and private markets may not be willing or able to provide it, says the Organization for Economic Cooperation and Development in a report released Tuesday.

Almost four years after the most expensive disaster ever for the insurance industry — the terrorist attacks that hit the U.S in 2001 — conditions on terrorism insurance markets have improved, the report says. But “there are continuing shortfalls in coverage, which could be revealed by another large-scale attack.”

The report examines the market’s evolution since 2001, as well as industry and government initiatives to address the challenge of modern terrorism compensation. One of its main conclusions is that private markets are not yet able to fully cover the extremely large losses that could result from future terrorist.

The OECD warns that terrorism insurance take-up rates remain low. As of the end of 2004, only about half of companies were insured in the U.S., while less than 3% of eligible firms have contracted with the German compensation scheme. “Under these circumstances, the economic and social impact of a new large-scale attack could be greater than in 2001,” it says. It recommends that countries develop risk awareness and consider incentives to extend coverage and increase the financial capacity of terrorism risk compensation mechanisms.

It also warns that chemical, biological, radiological and nuclear terrorism risks (CBRN) are generally excluded from insurance coverage and are not always fully covered through existing government-backed insurance schemes. “Governments should work with the insurance industry to find sustainable solutions for coverage,” it says.

Estimates on maximum losses resulting from a single terrorist attack range from US$50 billion to US$250 billion. The losses associated with very large-scale terrorist attacks can remain beyond the capability of the private insurance and reinsurance industry to price and absorb alone, the OECD says. “Mega-terrorism may even result, in some countries, in losses exceeding the joint compensation capacity of private markets and governments to compensate for them without threatening national economic stability. Ex ante cooperation between interested countries may thus be considered in the future,” it suggests.

According to the report, OECD countries have also agreed that financial markets have so far shown little appetite for terrorism risk and are not expected to increase capacity substantially in the short term. Furthermore, changes in the tax and accounting environment may be considered to reduce the cost to the insurer of building up reserves to cover expected future catastrophe losses and to promote the development of alternative risk transfers.