HOW TO INSURE TERROR
Washington Post: The terrorist attacks have hit the airline network and the postal network, two arteries of the economy. But they have also hit insurance, another industry that underpins the orderly working of business. In order to attract capital, companies have to convince investors that their money won't be suddenly wiped out, so they insure their buildings and property against fire, earthquakes and other catastrophes. But next January, when many existing policies expire, companies may find terrorism coverage impossible to buy. The administration and Congress are rightly working to head off that danger. But their ideas are unconvincing.
The administration and some leading senators want the government to pick up most of the cost of future terrorist attacks after the industry pays the first $10 billion. Property/casualty insurers have reserves of more than $300 billion, so even after paying out $30 billion-plus for Sept. 11, they have enough to sustain a further hit of $10 billion. Of course, individual insurers have much smaller reserves, so a terrorist attack on property covered entirely by one or two firms might cause bankruptcies. But insurers are expert at parceling out risks among themselves. Commercial skyscrapers are covered by syndicates of firms, so that none is liable for more than a fraction of the value.
Thus far the administration-Senate plan looks good. But it has two weaknesses. First, the government is relieving the insurance industry of a large amount of risk without charging anything for this service; it ought to collect premiums from the industry, much as a private reinsurer would do. The rival House plan includes a mechanism for compensating taxpayers for the new risk, and is in this respect superior. The insurance industry itself proposed a scheme involving payments to the government. Why would government refuse this offer?
High-risk sites: Second, the administration-Senate plan may underestimate the problems that flow from the unpredictability of terrorism. Nobody knows whether the chance of an attack on a landmark building over the next year is one in a thousand or one in a billion. Faced with this uncertainty, insurers may stop offering terrorism coverage even if the government is picking up a large percentage of the claims. The Senate plan addresses this issue by obliging property/casualty insurers to include terrorism coverage in their policies. But that might make insurers withdraw property coverage altogether from high-risk sites, or price it unaffordably.
The administration says that time is running out, and that imperfect legislation is better than nothing. This is true, and it may be that the government comes up with a plan that gets insurers to cover most property in the country; the landmark sites considered too risky to touch would then be covered directly by the government.