Private Market Must Pick Up Terrorism Re

CBO director: Federal role is determining how to tapinsurance

By Matt Brady

Washington

The public sector should not be considered as the main sourcefor terrorism reinsurance, contends Douglas Holtz-Eakin, directorof the Congressional Budget Office.

"The idea that the private sector can't bear these costs ismisplaced," he said here at the National Symposium on TerrorismRisk Insurance.

In fact, he explained, any role played by the federal governmentwould eventually fall onto the shoulders of the private sectoranyway–either as a surcharge after the fact or in the form ofincreased taxes to make up for increased government spending.

He argued that the federal government's role in dealing withterrorism risk issues should be more indirect, along the lines ofhelping the private sector carry the load.

"The federal role," he said, "is to ask and answer the questionof how to best tap the resources of the private sector."

Mr. Holtz-Eakin made his comments early last week as the life ofthe Terrorism Risk Insurance Act continued ticking down to its Dec.31 expiration date.

Three speakers introduced a series of principles they saidshould guide policymakers as they consider solutions to theterrorism risk issue. Among the principles is that since terrorismis a national security issue, "the public sector has responsibilityfor making terrorism insurance widely available and encouraging itspurchase."

The principles were proposed by Howard Kunreuther, co-directorof Wharton Risk Management and Decision Processes; Robert Reville,co-director of the RAND Center for Terrorism Risk ManagementPolicy; and University of Southern California Professor Detlof VonWinterfeldt.

Jacques Dubois, chairman of Swiss Re America Holding Corp., saidnational security concerns on the part of the government, whileunderstandable, also make it impossible for insurers to evaluateand underwrite terrorism risk. He said the government keepsinformation on terrorist attacks largely classified, noting that"information is not available to the private sector and notavailable for insurance companies to assess the risk."

Mr. Dubois also argued for an extension of TRIA, contending thebackstop has "worked," adding that it has "protected" the insuranceindustry and allowed for the spreading of losses and risk. However,he conceded that TRIA was crafted as a temporary solution ratherthan a permanent system for handling terrorism risk.

"We need to recognize that this is not a temporary issue, and atemporary solution is not a good idea," he said. The governmentneeds to establish a permanent system. If that involves making thefederal government the underwriter for terrorism reinsurance, "thenlet's make it so," he said.

At a separate event held by the Washington Legal Foundation lastmonth, Warren Heck, chairman and chief executive officer of theGreater New York Mutual Insurance Company, said the main criticismsvoiced against the federal "backstop" created by TRIA areuntrue–namely that the backstop was preventing growth of a privatemarket and emergence of new capital for terror reinsurance.

In fact, he said, worldwide capacity for terrorism reinsurancestands at $6 billion if you exclude nuclear, biological andchemical coverages. With those coverages, he said, capacity dropsto $1 billion.

"How would that help us with losses of about $250 billion" inthe event of a major attack? he asked.

If TRIA is allowed to lapse, he warned, instead of a privatemarket growing to assume terrorism risk, insurers would excludewhat they know is an unpredictable risk and therefore reduce theamount of market capacity. "A smaller private market will furtherexpose the federal government to more losses in the event of aterrorist attack," he said

In the short term, he agreed that the deductibles and triggerlevels of the TRIA program should be raised "moderately." Longerterm, however, he said Congress must set up a public/private risksharing mechanism.

"It doesn't have to be Pool Re," he said, referring to the nameof the partnership in Great Britain. "But it does have to be somekind of pool. It has to have some government backing."

Lawrence Mirel, outgoing commissioner of the Department ofInsurance, Banking and Securities for the District of Columbia,offered a more specific proposal for a federal pool that would haveuniform premiums for all policyholders and would not be limitedsolely to covering terror risks.

"I don't think it matters what the cause of a loss is," Mr.Mirel said. "The trigger for an event should be the size of theloss."

Under a pool system, the amount of reserves for a catastrophicloss would rise much more quickly and could provide a bettercushion before the federal government became involved, he said.

Mr. Mirel said he hoped the looming deadline would promptCongressional action. But with other issues crowing the legislativecalendar, "it's beginning to look like we're running out of time,"he said.

Flag: Point-Counterpoint

"The idea that the private sector can't bear these costs ismisplaced," says Congressional Budget Office Director DouglasHoltz-Eakin.

Swiss Re America Chairman Jacques Dubois says classifiedinformation on terrorist attacks "is not available to the privatesector [or] for insurance companies to assess the risk."