Government Insurance Against Terrorism
October 4, 2002
Last year's terrorist attacks resulted in the biggest insured losses ever, worse than any scenario in the risk models that insurers use to determine possible maximum losses. Warren Buffet, head of an insurance-dominated conglomerate has told his shareholders that terrorist risk has become impossible to quantify. According to Buffet, terrorist attacks cannot be insured against unless the government serves as an insurer of last resort.
Insurance coverage against terrorism has dropped precipitously:
- Previously, insurance against terrorism was just part of general property and casualty policies, for no extra charge.
- Now insurers are excluding terrorist risk from their property and casualty cover and reinsurers are refusing to insure primary insurers against terrorism.
- A limited market for terrorism insurance has developed in the past year, but such coverage is expensive and not available to all.
Lawmakers have made proposals to cover terrorism. The House of Representative passed a bill that would offer loans to 90 percent of the losses caused by terrorism. The Senate passed a more generous two-year scheme.
However, many disagree that the government is truly necessary. Kenneth Froot of the Harvard Business School says that having no federal backstop did the market a lot of good. He further argues that a new federal program might only create more red tape. In the private sector, new methods of risk modeling are developing, such as the Terrorism Loss Estimation Model.
Source: "Look, no umbrella," The Economist, September 29, 2002.
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