Avoiding distortions to markets and insurance systems from the risk of attacks such as those on September 11th, 2001, will be critical to insulating economies from such disasters, the Organisation for Economic Co-Operation and Development (OECD) said yesterday.

In a paper released as part of its twice-yearly Financial Market Trends report, the Paris-based think-tank said governments should look closely at how financial systems cope with the rising risk of man-made as well as natural catastrophes.

The report, published as policymakers assess the impact on their economies from March 11th's deadly attack on the Madrid train system, said rigorous contingency planning was needed.

It said governments and central banks had temporary roles to play in providing extra liquidity to ease stretched payments systems and also cash for compensation.

But they needed to act quickly and to communicate effectively with market players.

The OECD urged the use of intelligence experts by insurers in assessing "terrorism risk" for better pricing of that risk. It also said the physical concentration of financial firms in certain cities and districts was worth reviewing.

"Preparing to deal effectively with the hugely complex threats of the 21st century is a major challenge for decision-makers in government and the private sector alike," it said.

But the report focused most attention on the role that can be played by the smooth functioning of the insurance sector.

The OECD said that, while no major bankruptcies have occurred in the industry despite payments associated with September 11th, "it has been suggested the insurance industry may not be able to withstand another shock of similar magnitude".

"The September 11th attacks... highlight the crucial role that a well-capitalised insurance sector plays for the proper functioning of the economy. The economy's ability to reallocate risks through insurance is an essential precondition for its functioning."

Two big problems that occur are a removal of insurance on certain "new" risks or a prohibitively costly rise in premiums because of an inability to accurately assess the chances and circumstances of such violent attacks.