Greenspan: Private Insurers Can’t Cover Terror Risk Without Government

July 20, 2005

Federal Reserve Chairman Alan Greenspan again testified that he believes that private insurers alone can’t handle the risk of losses resulting from terrorist attacks.

In testimony before the House Financial Services Committee that echoed previous remamrks, Greenspan maintained that terrorism and geopolitical risk have become enduring features of the global landscape.

“The type of terrorism that is arising in the context of increasing technologies which were not available before has created the possibilities of huge losses. And there is no way for a private system to handle that,” he told Congressional lawmakers who are weighing whether to renew the federal terrorism program known as TRIA, the Terrorism Risk Insurance Act.

“…I don’t see how we can avoid the issue of a significant segment of
government-backed reinsurance in this particular area,” Greenspan added.

Financial Services Committee Chairman Michael Oxley (R-Oh.) last week remarked that “potential damage to the economy is large” if the federal backstop expires.

Also last week, Senate Banking Committee Chairman Richard Shelby (R-Al.) told reporters he believes some type of terrorism insurance program will be approved by Congress this year.

The insurance industry supports renewal of TRIA, which expires at the end of the year. A recent report by the U.S. Treasury Department appeared to suggest that the Bush Administration would oppose TRIA but in testimony last week before the same House and Senate committees, Treasury Secretary John Snow suggested the Administration would support a renewal of TRIA if it the government’s participation is scaled back from current levels. The Treasury has proposed raising deductibles and co-payments and hiking the amount of a triggering event to $500 million.

“The issue is getting that balance right,” Snow said in his remarks, referring to how much role the government should play versus private insurers and reinsurers.

Several committee members suggested the $500 million trigger was too high but there appeared to be a consensus that a final proposal will include a shift in responsibility to the private sector as the Administration has urged.

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