Gov't Has Duty To Insure Terrorism Risk

Governments in a number of countries are considering playing a role in providing terrorism insurance. Programs are already in place in a number of countries–notably France and the United Kingdom. In the United States, both the House and Senate have passed bills encompassing federal government participation in the financing of terrorism cover, although passage remains problematic for a variety of reasons.

Two main lines of argument are used to support establishing a role for the government in terrorism insurance.

The first line of argument stresses the role of insurance in the private sector in supporting commerce and thus promoting economic growth and stability. For example, the Senate's legislation, S. 2600, states: “The United States Government should provide temporary financial compensation to insured parties, contributing to the stabilization of the United States economy.”

A second line of argument, most notably associated with Warren Buffet, holds that terrorism is an uninsurable risk and hence needs to be provided by the federal government.

A connection between these two lines of argument can be tied to the use of the word “temporary” in the above statement from Senate Bill 2600. The notion is that the events of Sept. 11 resulted in a temporary dislocation of insurance markets, resulting in lack of coverage for terrorism. Therefore, the government should play a role in alleviating the disruptions caused by this short-term problem in private markets.

I have had an uneasy feeling about the logic of these viewpoints. I would suggest that there is something different about the terrorism peril that both justifies and, indeed, requires a federal response.

Our response to acts of terrorism really goes to the heart of what is a nation and what is the role of government.

When the terrorists struck the Pentagon and the World Trade Center, their target was “us”–all of us, the United States of America, not just those unlucky enough to be in those buildings, or on the four hijacked planes that fateful day. The attack was aimed at the nation, its ideas, its policies, and, indeed, its very existence,

This perspective, that terrorism is a national issue, was made clear from our major policy response to the terrorist threat–a collective, unified attack by the nations defense forces on Al Qaeda and its Taliban supporters in Afghanistan.

So when we address the issue of compensation, it would appear that the first principle should be in the same “national response” vein. Those injured by terrorists should be compensated by all of us. The attacks were on all of us, and so all of us should respond.

Given the general private-market bias of economists, not least this author, this point of view might appear slightly shocking to readers. But I would argue that if ever there is a justification for a government role in the economy, it is in this case of terrorism.

If one believes that the government should play a role in national defense, since a foreign power attacking the United States is an attack on all of us, then one must by the same logic accept a governmental role in addressing the terrorism issue, including compensating victims of terrorism.

One might argue that the governments role in the area of terrorism be restricted to risk prevention and not be extended to compensation. After all, in the case of war, we would not expect the government to have a victim compensation system in place, as such a system could bankrupt the government in, say, a nuclear war.

But, in the case of terrorism, the bankruptcy of the federal government appears to be a remote possibility, and a compensation system can have pre-set limits.

The current proposals for a federal role in property-casualty insurance could lead to some obvious inequities. Consider a situation where a two-plane attack on New York City results in one plane destroying a prestigious building owned by a prominent real estate developer, while the other plane gets misdirected or shot down and crashes in a disadvantaged urban area, populated by low-income people, who have no insurance.

Would we be happy that the federal support system provided millions of tax dollars through the subsidization of property-casualty insurance to the real estate mogul, and nothing to the other, uninsured victims?

It should be noted that a compensation plan set up in advance of a terrorist attack would avoid some of the budget-busting problems of many government programs. Frequently, government programs are set up to the advantage of a particular interest group, at the expense of the tax-paying, but frequently silent, majority. (Readers not convinced of this should review the current debate on agricultural support programs, or review the history of the black lung program.)

However, in the case of terrorism, the special interest groups are typically set up after the disaster, not before. This means that a compensation program set up in advance has less of the potential for special interest lobbying. And once such a program is in place, private sector insurance policies could be written in excess of government support, similar to many pension plans and Social Security.

Of course, so far we have only addressed the easy questions–whether and why the government should play a role. Now come the more difficult questions, such as:

What kind of role?

How should this role interact with private sector compensation systems?

How can such a system be designed to encourage sound risk management and loss prevention?

There are no easy answers, but it is better that responses be drawn up in a context that accepts, as a first principle, a prominent role for the government in providing terrorism insurance.

Sean F. Mooney, CPCU, is senior vice president, research director and economist at Guy Carpenter & Company in New York.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Gov't Has Duty To Insure Terrorism Risk

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