TERRORISM INSURANCE: WHO BEARS THE RISK?
July 19, 2005
A major battle is brewing in Washington over whether or not the federal government should continue to be the main provider of terrorism risk insurance, says New York Times contributor Edmund Andrews.
The Terrorism Risk Insurance Act, which obligates the government to reimburse insurance companies for most of their insured losses -- up to $100 billion a year -- that arise from terrorism, is set to expire at the end of the year.
The Bush administration and Congressional Republican leaders are opposed to extending the legislation, saying that private insurers can handle the task and the government should get out of the way.
However, supporters claim:
- The potential losses are so big and unpredictable that private insurance would either become prohibitively expensive or dry up.
- They warn that commercial development in major cities would slow to a crawl, businesses would relocate and jobs would disappear.
- Total insured losses -- property, life and liability claims -- are estimated to equal $31.7 billion and a failure to renew the law would cost the overall economy about $53 billion in lost economic activity and lead to 326,000 fewer jobs.
But the actual evidence is less clear.
- Despite losses in 2001, the financial position of insurers is still as strong today as it was before the attacks, says Andrews.
- Since 2001, income from premiums, investment returns and the industry's net worth has increased and reached a new high in 2004 of $369 billion -- $50 billion higher than it was in 2000.
The biggest question is this: if the government offered free terrorism insurance would the country forget about the potential cost and would companies be tempted to cut corners since they wouldn't have to worry about higher premiums or deductibles?
Source: Edmund L. Andrews, "Who Bears The Risks Of Terror?" New York Times, July 10, 2005.
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