Terrorism Insurance and Home Security

The issue of whether or not the government should be in the business of providing terrorism insurance is a confusing one. Congress clearly has a problem with it. Although the House passed its version of a bill that would create a federal terrorism insurance backstop, the Senate failed to consider a bill before it recessed for 2001. If and when it takes up where the House left off and addresses the issue, the Senate has its work cut out for it.

Certainly insurance, whether privately-funded or government-backed, can’t protect us against future terrorist attacks; it can only help us clean up the mess should such an attack regrettably occur. But the lack of such insurance, or the expense and difficulty in obtaining it, is creating problems for American businesses.

A report completed this year by the General Accounting Office noted that some sectors of the economy are unable to obtain sufficient terrorism coverage at any price, concluding that large and small businesses alike are at risk. A decision by Congress not to act could have severe consequences for businesses, and potentially hamper economic recovery and growth.

In addition, the Securities and Exchange Commission is reportedly considering requiring companies without terrorism-risk insurance to disclose that fact to investors, a requirement most affected businesses are against, fearing investor reaction.

Speaking in February before the House Financial Services Committee, Federal Reserve Chairman Alan Greenspan addressed the issue: “In all insurance, you have to have some general knowledge of what the parameters of what could happen are, or you cannot set premiums. In this case, it is virtually impossible to do so….” He added that Congress may need to stipulate that in the event of a clearly defined terrorist attack, “the federal government, with some deductible, would cover the cost of that.”

Even venerable investment guru, Warren Buffett, stepped into the fray. Known as the “Oracle of Omaha” for his sagacity in investment matters, Buffett’s Berkshire Hathaway Inc. nevertheless suffered a $2.4 billion hit from the World Trade Center attacks through its reinsurance operations, including General Re. And, as Charles E. Boyle, Insurance Journal’s international editor aptly put it: “A company the size of General Re, backed by Berkshire, can afford such losses—once.”

In his annual letter to investors, Buffett concluded: “Under a ‘close-to-worst-case’ scenario, which could conceivably involve $1 trillion of damage, the insurance industry would be destroyed unless it manages in some manner to dramatically limit its assumption of terrorism risks. Only the U.S. Government has the resources to absorb such a blow. If it is unwilling to do so on a prospective basis, the general citizenry must bear its own risks and count on the Government to come to its rescue after a disaster occurs.”

According to the American Insurance Association, the U.S. business community, including the insurance industry, supports a short term plan through which the private insurance market and the federal government would share responsibility for the backstop. In a statement, the AIA said the need for such insurance is further highlighted by the fact that the Bush administration has indicated the threat of another terrorist attack on the U.S. remains. It pointed out that a “federal terrorism insurance backstop would cost taxpayers nothing unless further, extremely costly attacks occur,” and that large-scale bailouts of businesses and governments as a result of future attacks would be prevented by a backstop.

A recent newsletter published by the Gale Group Inc. suggested that the crisis related to terrorism insurance may be easing. It reported that American International Group (AIG), AXIS Specialty and Berkshire Hathaway have come out with policies that provide terrorism coverage, but added that those policies are expensive. It also noted that large commercial property owners in Chicago and Indianapolis, including Simon Property, have been able to secure blanket terrorism coverage for their properties, including one for the Mall of America, which is owned by a Simon partnership. However, the newsletter added that, while coverage for things like plane crashes and explosions may be more available now, some types of terrorism, such as chemical and biological attacks, are still being excluded from many policies.

Terrorism, by its very nature, is unpredictable. When, where, how, or even if, terrorist strikes will occur are events that can not easily be assessed, if at all. Congress has the responsibility to look at the terrorist problem as a societal danger and should consider what will work best, not only for the economy, but for the country as a whole. As Greenspan stated, in closing remarks to the House committee on the terrorism insurance issue: “There is a very difficult problem of how one handles things over which one is not responsible. The issue of home security is now in fact undistinguishable from our national defense budgets.”

Stephanie Jones is the managing editor of Insurance Journal – Texas/South Central.

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