Clearly, insurance companies are in a tight spot. States, which regulate the industry, require underwriters to provide terrorism coverage, and will likely continue to do so. But the industry contends that it has no choice but to either forgo offering such coverage to businesses it considers an undue risk, or charge such exorbitant rates as to be prohibitive. The reason: reinsurance companies, which back up their policies, say they'll cut off terror insurance on Jan. 1, when trillions of dollars in policies expire. That could prompt underwriters to balk at writing policies altogether because they don't want to be left holding the bag. With no coverage, lenders won't lend, builders won't build, and business will grind to a halt.
The Bush Administration wants to avoid that frightening scenario--but is it giving away too much? Insurance companies are currently sitting on a $130 billion pool of capital for commercial losses. Even after paying for the September 11 attacks, most of that money will still be available. But the Bush plan would put the Treasury on the hook for most terrorism damage in the next three years: Up to $88 billion in 2002, if claims hit $100 billion, and another $141 billion in 2003 and 2004.
The Administration argues the plan is fair for everyone: It helps insurers handle coverage of any terrorism over the next three uncertain years. In return, it requires the industry to share the burden with taxpayers: In year one, the government would pay 80% of claims on the first $20 billion in damages, and 90% on the next $80 billion. In years two and three, insurers would be responsible for larger shares of the cost. Even if the next three years are disastrous, the industry's exposure is capped at $70 billion. "This plan can be sold on Capitol Hill as short-term emergency relief, just like food and blankets for flood victims," says analyst Steve Blumenthal of Schwab Capital Markets.NO STRINGS. The White House also insists that three years is the right time frame for shoring up the industry. That should allow underwriters to assess the real cost of terrorism and adjust premiums. And it will allow them time to set up private reinsurance pools for future coverage.
There's only one problem: The Administration isn't asking underwriters to pay anything for this new terrorism coverage. But the government should charge insurers premiums for it, so that, over time, insurers will reimburse the U.S. Treasury for any costs. That could be done by charging small premiums in coming years to all businesses, thus spreading the costs out broadly, and over time. The result: Industry would get the coverage it needs without being forced to raise rates to cripplingly high levels, while business, rather than the taxpayer, would foot the bill.
Such an arrangement wouldn't require a large bureaucracy or federal regulation. "Three actuaries in a room could come up with a premium plan," says J. Robert Hunter, director of insurance for the Consumer Federation of America. He did just that as director of the U.S. Riot Reinsurance Program, which brought insurers back to inner cities after the urban pillaging of the 1960s.
The best model could be the Federal Deposit Insurance Corp. Individual banks have over the years paid small premiums that cover all banks against enormous potential losses. The FDIC, like any good insurance plan, spreads risks instead of ducking them. Terror risks should be covered the same way. By Diane Brady in New York with Mike McNamee in Washington