I find this debate interesting. I see both sides of the argument. First, I think government intervention in almost anything as a negative. Subsidies typically artifically lowers the price of any product or service and leads to over-consumption of that product or service. The National Flood Insurance program incetivizes people to build where they shouldn’t and has the rest of us foot the bill for that bad choice.
On the other hand terrorism is an interesting item. Despite what many on the left might beleive, the PRIMARY function of any governmnet (going back to ancient times and before) is to protect its citizenry from external and internal harm. Far and away that is job 1. On September 11, 2001 the government failed in that duty. Trying to model the costs of insuring terrorist events is something that is pretty impossible to do. As such the inclination of the industry is not to insure against it as they typically do with intentional or criminal acts by the insured. The effects on the economy of being unable to find this insurance would be terrible (worse than Obamanomics). As such, a “backstop” to the industry who still maintains a very large retention can be argued to make sense, again as a successful terrorist attack is at least in part caused by a failure of government to protect.
Debating how much the backstop should be and at what level it should kick in makes sense. As time goes on, the protcetion it can be argued should be lower. But to eliminate it makes little sense to me for the reasons mentioned above.
“TRIA does not cover nuclear, biological or chemical terrorism, losses would not reach anywhere near the $600 billion and are even unlikely to reach $100 billion.”
Quite false, and a childlike misinterpretation of an earlier failed proposal to require insurers to cover NBCR. Fact is, if any of these happen as a result of a certified act of terrorism, and the policy has no NBCR exclusion, it’s covered.
For once, I agree with you Dave. Probably because your comment is more insurance-slanted than it is politically-slanted. Because number one, we are all insurance professionals on this site.
What reinsurers would cover this??? I don’t think there are any. And if there are, I’m sure their rates would be significantly highter than current TRIA rates. I agree with Hartwig – the extra costs would ultimately go to consumers.
One could also argue that if the Federal Government does not directly take a share of the risk in this program, then the federal government accepts moral hazard. In other words, why should the federal government prevent terrorist attacks if private industry is going to step in to pay for the losses?
Good post, Actuary. Your 2nd point is well made, but i think the federal government has an incentive to stop terrorism if only to ensure it continues to be our federal government.
The CFA apparently doesn’t understand that if TRIA goes away one of two things will happen. Either the coverage will become unavailable, or companies will raise rates to coverage the reinsurance they will have to buy. It won’t be is a “savings” of $7B to the federal government because they aren’t providing free reinsurance anymore.
I find this debate interesting. I see both sides of the argument. First, I think government intervention in almost anything as a negative. Subsidies typically artifically lowers the price of any product or service and leads to over-consumption of that product or service. The National Flood Insurance program incetivizes people to build where they shouldn’t and has the rest of us foot the bill for that bad choice.
On the other hand terrorism is an interesting item. Despite what many on the left might beleive, the PRIMARY function of any governmnet (going back to ancient times and before) is to protect its citizenry from external and internal harm. Far and away that is job 1. On September 11, 2001 the government failed in that duty. Trying to model the costs of insuring terrorist events is something that is pretty impossible to do. As such the inclination of the industry is not to insure against it as they typically do with intentional or criminal acts by the insured. The effects on the economy of being unable to find this insurance would be terrible (worse than Obamanomics). As such, a “backstop” to the industry who still maintains a very large retention can be argued to make sense, again as a successful terrorist attack is at least in part caused by a failure of government to protect.
Debating how much the backstop should be and at what level it should kick in makes sense. As time goes on, the protcetion it can be argued should be lower. But to eliminate it makes little sense to me for the reasons mentioned above.
“TRIA does not cover nuclear, biological or chemical terrorism, losses would not reach anywhere near the $600 billion and are even unlikely to reach $100 billion.”
Quite false, and a childlike misinterpretation of an earlier failed proposal to require insurers to cover NBCR. Fact is, if any of these happen as a result of a certified act of terrorism, and the policy has no NBCR exclusion, it’s covered.
For once, I agree with you Dave. Probably because your comment is more insurance-slanted than it is politically-slanted. Because number one, we are all insurance professionals on this site.
What reinsurers would cover this??? I don’t think there are any. And if there are, I’m sure their rates would be significantly highter than current TRIA rates. I agree with Hartwig – the extra costs would ultimately go to consumers.
One could also argue that if the Federal Government does not directly take a share of the risk in this program, then the federal government accepts moral hazard. In other words, why should the federal government prevent terrorist attacks if private industry is going to step in to pay for the losses?
Good post, Actuary. Your 2nd point is well made, but i think the federal government has an incentive to stop terrorism if only to ensure it continues to be our federal government.
The CFA apparently doesn’t understand that if TRIA goes away one of two things will happen. Either the coverage will become unavailable, or companies will raise rates to coverage the reinsurance they will have to buy. It won’t be is a “savings” of $7B to the federal government because they aren’t providing free reinsurance anymore.
Once again, Robert Hunter opens his mouth to attract attention and justify his position.