No one likes risk, especially after September 11. Everyone seems to be attempting to put the burden on Uncle Sam. Even insurance companies, designed to bear risk, are demanding a subsidy from Congress.
The September terrorist attack will cost insurers at least $35 billion. That's a major hit, but much of it will fall on foreign reinsurers. Moreover, the industry has assets of $3 trillion and some $300 billion in capital (a bit more than half held by commercial operators).
In light of the 1993 bombing of the World Trade Center, insurers knew that another terrorist attack was possible. They may have guessed wrong about the magnitude of the loss, but that is their fault. As Warren Buffett, chairman of Berkshire Hathaway Inc., acknowledges, he "allowed Berkshire to provide insurance coverage for a huge catastrophe loss without its getting a premium for doing so."
Yet the attack has positioned insurers to profit from offering more desirable, and expensive, coverage. Reports Christopher Oster of the Wall Street Journal: "Insurers have seen improved financial prospects since Sept. 11."
Seven companies have issued new stock, and a half dozen are starting new subsidiaries -- mostly overseas, to obtain better regulatory and tax treatment -- to cover terrorism. "There is a financial reward to doing so," explains Marsh & McLennan Vice Chairman Charles Davis. Even as they are preparing to cash in, however, insurers and reinsurers are threatening not to write policies without government aid. They argue that the risk would be too great -- for themselves.
With contracts coming up for renewal on Jan. 1, reinsurers may either sharply increase premiums or end coverage altogether. Insurers worry about state price controls and are drafting exclusions for any terrorist losses. But states could prevent such restrictions. In which case, insurers wouldn't insure. Then businesses would have to bear the burden themselves. Which, bailout proponents warn, would end commerce as we know it.
In fact, Congress should leave the insurance market alone. Commerce won't stop. Rather, people in risky endeavors will have to pay more. For instance, flying planes seems more risky after September 11. Congress bailed out U.S. carriers; foreign airlines received no such help, but are still buying insurance, by paying a $3.10 per person surcharge for terrorism coverage. Skyscrapers now seem dramatically more risky than before. Yet their owners can still get insurance -- it just costs an extra 20 percent to 100 percent in Manhattan, based on current quotes.
In short, insurance will always be available. People want subsidies to make it cheaper. But if the cost becomes prohibitive, then it would be best to abandon the activity, not subsidize it. Would, for instance, any insurer cover, at an affordable price, a new, 110-story World Trade Center? Perhaps not. Mr. Buffett warns: "Great cities are central to our society. We don't want them to wither under the burden of hugely disadvantageous insurance costs."
But the U.S. economy does not depend upon the construction of 110-story office buildings. Twice as many 55-story buildings might make more sense. And maybe more of them should be built outside of Manhattan. Leave the market alone, observe analysts Scott Harrington and Tom Miller, and:
"Look for accelerated entry in offshore reinsurance markets and a burgeoning market in catastrophe bonds and insurance derivatives, which offer larger returns to investors willing to handle greater risks.
"In high-risk regional markets for office space and business construction, borrowing costs and down payments will be higher. Fewer buildings will be constructed. New office space will be designed differently, and business operations will become less concentrated."
Indeed, allowing the market to work will force insurers and insured to cooperate to moderate risks. They will do that most effectively if Uncle Sam is not standing by, checkbook in hand. Warns the Congressional Budget Office, a federal program "would probably retard the private sector's adjustment to the increased risks and preempt a long-term increase in the supply of private insurance."
Congress should preempt counterproductive state restrictions. Insurers could then charge whatever price is necessary and exclude coverage whenever necessary. Beyond that, legislators should focus on truly catastrophic occurrences that threaten the entire industry.
For instance, Mr. Harrington and Mr. Miller suggest allowing the tax-deferred accumulation of loss-reserves. An ex post, industry wide assessment could also be levied above a high threshold to help meet exceptional losses. Any federal payment should occur at an even higher level, with an industry co-pay. Total government exposure should be capped. And, perhaps most important, any program should be temporary.
The goal, notes David Keating of the National Taxpayers Union, should be to "encourage the re-entry of private reinsurance at higher levels at the earliest possible date."
Risks don't disappear and costs don't fall when Uncle Sam gets involved. Markets are far better than politics at managing risk.