By EDMUND L. ANDREWS -WASHINGTON
IF nothing else, the synchronized bombings
and bloodshed in London on Thursday will
stifle any creeping complacency about the
risks of terrorist attacks.
The London bombings dovetail with a major
political battle, just starting in
Washington, about how to deal with that
risk. Specifically, should the federal
government continue to be the main provider
of terrorism risk insurance?
At issue is the Terrorism Risk Insurance
Act, which was enacted in response to the
terrorist attacks of Sept. 11, 2001, and is
set to expire at the end of this year.
The law obligates the government to
reimburse insurance companies for most of
their insured losses - up to $100 billion a
year - that arise from terrorism.
The issue is crucial to New York City,
which bore the brunt of the Sept. 11
attacks, as well as to other major cities
like Los Angeles and Chicago that offer
high-visibility targets.
Insurance companies, commercial real
estate developers, construction companies
and virtually all of New York's political
and business leadership are lobbying hard
for a renewal.
But the Bush administration and
Congressional Republican leaders are opposed
to extending the legislation. In a report on
June 30, the Treasury Department declared
that private insurers were ready to shoulder
the task and that the government should get
out of the way.
Representative Tom DeLay of Texas, the
House majority leader, immediately endorsed
that conclusion, saying that "any solution
must depend on the ingenuity of private
insurance markets." And the Senate majority
leader, Bill Frist of Tennessee, said that
the need for federal help had "run its
course."
Part of the political battle now is
between urban and Democratic-leaning states,
like New York and California, and
Republican-leaning states in the Midwest and
South that may have fewer high-profile
targets.
But the battle also poses fundamental
economic questions about who should bear
risks against catastrophic events.
Insurance companies offer protection
against losses from hurricanes and
earthquakes. What is so different about
terrorism? And if taxpayers foot the bill
for terrorism losses, will companies that
face such threats have less incentive to
bolster their security in advance?
Supporters of the current law contend
that the potential losses are so big and so
unpredictable that private insurance would
either become prohibitively expensive or dry
up. If that happened, they warn, commercial
development in major cities would slow to a
crawl, businesses would relocate and jobs
would disappear.
The attacks of 9/11 did set new records
for a catastrophe. Total insured losses,
including property, life and liability
claims, are expected to total $31.7 billion,
according to the Insurance Information
Institute. That would far eclipse the $20
billion in property losses that stemmed from
Hurricane Andrew in 1992.
Indeed, one vocal supporter of extending
the federal law is R. Glenn Hubbard, a
former chairman of President Bush's Council
of Economic Advisers who is now dean of the
Graduate School of Business at Columbia
University.
A
report last year by Mr. Hubbard and
Bruce Deal, a principal of the Analysis
Group consultancy, warned that "the extreme
and unpredictable losses associated with
catastrophic terrorism cannot be borne by
the private sector alone." The report was
financed by the insurance industry.
Failure to renew the law, Mr. Hubbard and
Mr. Deal said, would cost the overall
economy about $53 billion in lost economic
activity and lead to 326,000 fewer jobs.
But the actual evidence is less clear.
Despite the breathtaking losses that
property and casualty insurers shouldered in
2001, the losses were hardly off the charts,
and their overall financial position is as
strong today as it was before the attacks.
THE "combined ratio" - the ratio of
insured losses to income from premiums for
property and casualty insurers - soared to
115 percent in 2001. But that was no higher
than after Hurricane Andrew in 1992 and
lower than in two other years.
To be sure, one effect of Hurricane
Andrew was that insurance companies
significantly scaled back the coverage they
offered. That could happen in the case of
terrorism insurance. Indeed, the Treasury
Department predicted in its report that the
short-term effect of ending the federal
terrorism insurance program would be less
insurance provided, and at higher prices. In
the long term, it added, "we expect that the
private market will develop additional
terrorism insurance capacity."
Since 2001, property and casualty
companies have bounced back very well.
Income from premiums has climbed, investment
returns have increased and the industry's
net worth reached a new high in 2004 of $369
billion - $50 billion higher than it was in
2000, the year before the 9/11 attacks,
according to the Congressional Budget
Office.
One of the leading critics of terrorism
risk insurance is Kent Smetters, now an
associate professor at the Wharton School of
the University of Pennsylvania, who helped
design the original program while at the
Treasury Department.
"The fact is that insurers were coming
back into the market, and they are being
driven out because of the law," he said in
an interview.
At a conference on Friday sponsored by
the American Enterprise Institute, a
conservative research organization here, Mr.
Smetters noted that insurance losses from
product liability claims have been many
times higher than those from terrorism, yet
insurance companies still offer product
liability insurance.
Mr. Smetters added that the uncertainty
surrounding terrorist attacks is not
necessarily that much higher than that
surrounding earthquakes and hurricanes.
But the biggest question is this: If the
government essentially offers free terrorism
insurance, is the nation as a whole deluding
itself about the potential costs? If the
insurance is free, would companies be
tempted to cut corners on security because
they didn't have to worry about higher
premiums or deductibles?
And there is the issue for taxpayers:
Unlike an insurance company, Congress is not
about to set aside tens of billions of
dollars to cover potential losses in the
future. If there were a repeat of Sept. 11,
the cost would all be borne in the form of
future budget deficits.
(Copyright 2005 The New
York Times Company)
