Free-Market Arguments Undermine Alleged Need For Federal Terror Re Bill
During my more cynical moments, I sometimes think to myself that business people support free-market principles–except for their own industries.
Too often, when market forces start moving in a direction that entrenched industries dislike, they run to Congress insisting their problems are "different," and the government needs to step in to prevent the marketplace from following its natural course.
I must confess that these thoughts occurred to me during the controversy over a federal government role in the terrorism reinsurance market. Indeed, in my previous commentary in this space, I raised some questions about whether the situation was as dire as some in the insurance industry suggested. (See, "Timing, Suspicion Hurt Insurers In D.C.," Dec. 3, 2001, page 41.)
I wondered whether businesses might find a way to muddle through even if the federal government did not provide the reinsurance backstop sought by insurance and other industries. Im glad to say that I share these ideas with others who are far more rigorous free-market thinkers than me.
Generally, my basic reporting on the terrorism reinsurance issue has presented only two points-of-view: The insurance industrys position that the government needs to step in to maintain the viability of the terrorism reinsurance market; and consumer groups who say that any federal assistance should be coupled with strict rate regulation.
Id like to use the balance of this commentary to discuss views of the free-market advocates, which I think have not been sufficiently aired. They are expressed in articles written by John Samples, Tom Miller and Peter Van Doren of the Washington-based Cato Institute, and in a separate piece written by Mr. Miller and Scott E. Harrington of the University of South Carolina.
In addition, I had a personal discussion on this issue with Mr. Miller.
(I should note that the insurance industry probably will not like what follows. But as I often say, pro-free-market is not the same as pro-industry.)
In an article appearing in a Web-based publication called NRO Financial, (www.nationalreview.com/welcome-financial.asp), Mr. Harrington and Mr. Miller say the following about terrorism reinsurance:
"The insurance industrys current message is that taxpayers should assume risks that insurers are unwilling to assume. Yet if private experts at risk assessment (insurers) wont put up their own companys money to offer insurance coverage, why should the public?"
Indeed, they say, subsidized federal reinsurance could make citizens more vulnerable to harm by discouraging rational responses to post-Sept. 11 attacks.
"If insurance against terrorist attacks is made available at substantially lower costs due to federal subsidies, will businesses be more or less likely to disperse their operations, relocate away from high-risk urban centers and invest in risk reduction?" Mr. Harrington and Mr. Miller ask.
During our chat, Mr. Miller noted that federal reinsurance might also discourage the creation of a viable private market for reinsurance coverage. With government reinsurance, he said, there is no incentive for private players to come and investigate what the right price for reinsurance coverage should be.
In their article, Mr. Harrington and Mr. Miller say that whether or not insurers provide a layer of risk-sharing protection, markets wont be failing.
"They (the markets) simply will be bringing us news that we dont like. We wont manage this risk effectively through mechanisms that try to tune out, rather than take in, market signals," they say.
Moreover, Mr. Harrington and Mr. Miller say, a government reinsurance program will only expand over time.
"Private interests never lobby for public insurance in order to ensure market prices. Low prices for politically-brokered insurance displace private coverage and expand the public program over time," they said.
And with taxpayers at risk, they add, greater federal regulation becomes a necessary quid pro quo.
Messrs. Van Doren, Miller and Samples, in a commentary written and sent to me after Jan. 1, 2002, when the sky was scheduled to fall, noted that business life goes on. They cited several published articles which suggested that while more insurers are passing the costs of terrorism risk to their customers, it is still not that big an expense on balance, and commerce has not halted.
"Free markets work best if they include all costs and benefits to market participants. No one likes the added costs and anxieties created by the Sept. 11 attacks, but we cant pretend they dont exist or that the government can magically make them disappear," they say.
"And despite the worst instincts of politicians and special interest pleaders," they added, "those markets are working."
Messrs. Van Doren, Miller and Samples say that government does have a role to play, but it does not involve greater entanglement in the insurance markets.
Instead, they say, by improving national security, government can reduce the risk of terrorism and its costs. That, they add, would go a long way toward reducing the uncertainty that now exists in insurance markets.
"Better security, not more subsidies, remains the best response to the events of Sept. 11," they say. "Markets can handle new risks as long as politicians dont overreact to imagined ones. Change the real risk. Dont hide its cost."
Steven Brostoff is NU's Washington Editor. He can be reached at sbrostoff@nuco.com.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 4, 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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