George W. Bush described last week's terrible attacks in New York and Washington as "acts of war". Insurance policies in the US generally exclude acts of war but cover terrorism. Thankfully, the insurance industry has not taken the president's words at face value.

Insurers and reinsurers of lives and buildings at the World Trade Center and the surrounding area have either explicitly or implicitly accepted their liability. Many US insurers have announced they will not invoke act of war exclusions. The big European reinsurers are making provisions for large payments. Munich Re, for example, on Thursday publicly estimated its possible losses from the "terrorist attack" would be E2.1bn.

The total insurance bill remains extremely uncertain but will be huge. It will exceed the $20bn cost of Hurricane Andrew in 1992, the most expensive nominal insured loss to date. In these circumstances, some insurers might be vulnerable. Insurance company shareholders are certain to be hard hit.

These losses are no reason for governments to provide state bailouts. The companies and shareholders accepted those risks voluntarily.

But after suffering such losses, insurers are almost certain to exclude terrorist activity from their commercial building and certain life policies. Airlines might face similar exclusions. Gaps in the insurance market such as these would have serious consequences for the wider economy. Aircraft could be grounded because airlines could not risk flying without insurance. Finance for commercial building purchase and construction would not be forthcoming. These gaps in insurance are a market failure that governments should fill.

Fortunately, governments that have faced significant terrorist threats, such as Spain and the UK, have already led the way. They have set up specific reinsurers, ultimately backed by state guarantee, to correct the market failure.

In the UK, Pool Re insures losses to commercial buildings that result from acts of terrorism, as defined by the Reinsurance (Acts of Terrorism) Act 1993. If its premiums and its reserves are exhausted, the UK government is committed to meet any remaining claims. Companies are not obliged to insure with Pool Re but its premiums tend to set the market rate.

Many governments should now set up or extend state-backed reinsurance schemes for terrorist attacks. They should act quickly. Insurers must not be bailed out for risks they willingly took but neither must terrorists succeed in further paralysing developed economies.