Insurance and Home Security

The issue of whether or not the government should be in the business of providing terrorism insurance is a confusing one. Congress clearly has a problem with it. Although the House passed its version of a bill that would create a federal terrorism insurance backstop, the Senate failed to consider a bill before it recessed for 2001. When it takes up where the House left off and addresses the issue, as is expected, the Senate has its work cut out for it.

Certainly insurance, whether privately-funded or government-backed, can’t protect us against future terrorist attacks; it can only help us clean up the mess should such an attack regrettably occur. But the lack of such insurance, or the expense and difficulty in obtaining it, is creating problems for American businesses.

A report recently completed by the General Accounting Office noted that some sectors of the economy are unable to obtain sufficient terrorism coverage at any price, concluding that large and small businesses alike are at risk. A decision by Congress not to act could have severe consequences for businesses, and potentially hamper economic recovery and growth.

In addition, the Securities and Exchange Commission is reportedly considering requiring companies without terrorism-risk insurance to disclose that fact to investors, a requirement most affected businesses are against, fearing investor reaction.

Speaking recently before the House Financial Services Committee, Federal Reserve Chairman Alan Greenspan addressed the issue: “In all insurance, you have to have some general knowledge of what the parameters of what could happen are, or you cannot set premiums. In this case, it is virtually impossible to do so…” He added that Congress may need to stipulate that in the event of a clearly defined terrorist attack, “the federal government, with some deductible, would cover the cost of that.”

According to the American Insurance Association, the U.S. business community, including the insurance industry, supports a short term plan through which the private insurance market and the federal government would share responsibility for the backstop. In a statement, the AIA said the need for such insurance is further highlighted by the fact that the Bush administration has indicated the threat of another terrorist attack on the U.S. remains. It pointed out that a “federal terrorism insurance backstop would cost taxpayers nothing unless further, extremely costly attacks occur,” and that large-scale bailouts of businesses and governments as a result of future attacks would be prevented by a backstop.

Terrorism, by its very nature, is unpredictable. When, where, how, or even if, terrorist strikes will occur are events that can not easily be assessed, if at all. Congress has the responsibility to look at the terrorist problem as a societal danger and should consider what will work best, not only for the economy, but for the country as a whole. As Greenspan stated, in closing remarks to the House committee, “There is a very difficult problem of how one handles things over which one is not responsible. The issue of home security is now in fact undistinguishable from our national defense budgets.”

Topics Catastrophe