Commentary: Terror Insurance: How to Stop the Coming Crisis

By Mike McNamee

Insurance companies aren't winning many plaudits as model citizens these days. In the wake of September 11, they jacked up premiums on all sorts of businesses far from the World Trade Center, including 300% increases on trucking companies and 400% increases for real estate developers. With the promise of profits from those steep hikes, they've wooed billions in new capital. All justified, perhaps, if the river of cash was flowing into a piggy bank for damages from future terror attacks.

But that isn't the case. Instead, insurers insist that Washington must take over the risk of covering any future attacks, to the tune of up to $80 billion. Little wonder that Congress has choked on making Uncle Sam the industry's deep pocket.

Trouble is, there's more at risk than insurers' balance sheets. Without terrorism coverage, real estate development, manufacturing, and transportation could effectively be shut down when many current policies expire on Jan. 1. So it's vital that Washington put a terrorism backstop in place. But tough love--not a bailout for insurers--ought to be the goal. Congress should do only what's necessary to give the economy the safety net it needs, without sticking taxpayers with all the risk or padding carriers' swelling profits.

"OBVIOUSLY HARMFUL" At the heart of the problem: States can force primary carriers to write terror policies, but they have no such reach over reinsurers--the companies that insure primary carriers. The reinsurers say they'll quit covering terror risks at the end of the year on the 70% of their policies that expire. That's why Congress' stalling is panicking business. "We can't fathom how Congress could fail to act on something so obviously harmful to the economy," says Tony M. Edwards, general counsel of the National Association of Real Estate Investment Trusts.

What will it take to get insurers to willingly cover terrorism again? One key is a predictable cap on losses. The Bush Administration and the Senate call for the industry to pick up the first $10 billion a year in terrorism damages. A hefty "deductible" will give insurers a strong incentive to enforce tight security and risk-reduction on their clients.

To restore coverage for high-profile businesses, the plan must also limit individual insurers' risks. No carrier will insure a high-risk property if a loss of, say, $3 billion would wipe out the company before government aid kicks in. A viable cap would limit the insurer's exposure to about 5% of its premium or 10% of its capital. The House bill, scheduled for a Nov. 29 vote, offers such a mix.

For damages over $10 billion, Washington will finance 80% or 90% of losses. But that aid shouldn't be a giveaway, as the White House proposed. Instead, insurers should pay back the government through assessments on all commercial property premiums. Stiff enough assessments would make reinsurers reconsider covering terror.

If terror attacks cause $100 billion in damages--almost twice the cost of September 11--the initial bill to taxpayers could hit $80 billion. But whatever taxpayers spend, they should eventually be reimbursed, even if it takes a decade to do so. Only if damages exceed $100 billion should Uncle Sam pick up all the cost.

Unfortunately, terror insurance is also entangled in the never-ending battle between business and trial lawyers. Business wants the insurance plan to limit lawsuits and punitive damages due to terror attacks. "If everybody is going to pay more, it's only reasonable to put limits on liability," says James Wootton, president of the U.S. Chamber of Commerce's Institute for Legal Reform. Lawyers and their Democratic allies have the Senate votes to block any plan that wipes out punitive damages. But business and the White House should hold out for some lawsuit limits, such as consolidating all cases in one federal court.

With lawmakers hoping to adjourn by mid-December, time is running out. Congress has all the pieces it needs to construct a sound safety net for terrorism risks. All it needs now is to get moving.

McNamee covers finance from Washington.

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