Senators Critical of Bush Assistance Plan

October 29, 2001

Senators from both parties criticized the Bush administration’s proposed three-year assistance program for the insurance industry to help it manage terrorism risk.

According to an AFX report, while some Democrats said the industry needs a long-term solution, a number of Republicans expressed concerns about the government getting into the insurance business, in a Senate Banking Committee hearing on proposed aid for the insurance industry following the Sept. 11 terrorist attacks.

Democrat Charles Schumer noted that “we’re playing with fire,” warning that without a longer-term solution to the problem, property developers will not construct large buildings that could be at risk to terrorism.

About 70 percent of property and casualty insurance contracts expire at year-end, Treasury Secretary Paul O’Neill informed the committee.

As reinsurance firms have said they will no longer cover acts of terrorism in contracts with primary insurers, this would leave businesses to deal with prohibitively expensive premiums, or exposing themselves to all such risk.

O’Neill indicated that leaving this problem unresolved threatens our economic stability, as uninsured companies would face higher financing costs. Ratings agencies would likely downgrade the creditworthiness of such companies to take account of their exposure to terrorist acts.

While members of the committee agreed that some action should be taken, a number of them criticized the administration’s plan, which would make the government responsible for 80 percent of claims up to $20 billion and 90 percent of claims above $20 billion that stemmed from terrorists attacks.

The government’s responsibility would phase out over the following two years. Democrat John Corzine noted that a long-term solution would most likely be the answer, noting that credit spreads have risen significantly since Sept 11, showing companies are finding it harder to raise capital. He said there is no reason to believe that reinsurance companies will step back into the market once the three-year plan is ended.

Republican Phil Gramm separately questioned whether the plan to include government coverage of 80 percent of the first dollar of insurance losses from terrorist events. He said having the industry exposed to 100 percent of the first portion of losses would offer a better incentive to the industry to transition towards assuming full responsibility itself.

Gramm noted the greatest fear he had is getting the government in the insurance business, cautioning that the industry could return repeatedly to Congress for continued support if the government begins assuming a substantial portion of exposure from the first dollar of losses.

O’Neill agreed the government should not enter the business itself, and noted the Bush administration had considered but rejected the idea of having the government assume 100 percent responsibility for losses due to terrorist acts.

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