Demand for terror coverage continues to fall in Germany.

An enduring mystery in the German insurance market is why German companies do not feel compelled to buy coverage for terrorism risks, despite major attacks in London this year and Madrid, Spain, last year.

Speaking at the inaugural meeting of the World Risk and Insurance Economics Congress in Salt Lake City, Christian Thomann, economics professor at the University of Hannover in Germany, said the necessity for terrorism coverage was reinforced by the series of bombings in London and Madrid since the Sept. 11, 2001, terrorist attack in the United States.

"We see from these events that terrorism is not going away," he said.

Germany provides terrorism coverage through Extremus, a government-backed primary insurer created in 2002. With falling demand for coverage, Extremus' total capacity fell to 10 billion euro (approximately $12.3 billion) in 2004 from 13 billion euro in 2003.

Even through Germany has been identified as a "hub" of al-Qaeda activity in Europe, demand for corporate terrorism insurance is still low, said Thomann. One reason appears to be price. Coverage by Extremus costs roughly 0.029% of the amount insured. That is between two and three times the cost of terrorism coverage under the U.S. Terrorism Risk Insurance Act, he said.

A study by Thomann and colleague Matthias Graf von der Schulenburg found that data from Extremus for 2003 and 2004 show most Extremus business is in the capital of Berlin, followed by the industrial cities of Frankfurt and Hamburg.

Companies that buy coverage from Extremus tend to be attracted by the "one risk class" aspect of the coverage, meaning they can cover a specific location or production technology that is seen as having a high risk, said Thomann.