SECTION: EDITORIAL PAGE, Pg.B8

LENGTH: 577 words

HEADLINE: TERRORISM INSURANCE;
NEEDED GOVERNMENT BACKUP COMES WITH A MANDATE FOR INSURERS

BODY:
The terrorism insurance bill signed by President Bush is neither the taxpayer-funded bailout depicted by critics or the economic panacea touted by its most ardent supporters. It is, instead, a prudent and temporary step toward stabilizing a troubled commercial real estate market still reeling from the attacks of Sept. 11, 2001.

How the market responds to that stability will determine how successful this move is, but there is a good chance the Terrorism Risk Insurance Act of 2002 will deliver what it promises. The main provision of the act is federal backup of insurance companies for the next three years, with the government agreeing to pay up to $100 billion to help cover any new terrorist-attack claims once they exceed $5 million. That reinsurance is intended to plug a huge gap that threatened to harm the economy.

In the wake of huge 9/11 claims, insurance companies either canceled terrorism insurance clauses they once had offered free with commercial policies, or started charging extremely high rates. An estimated $15 billion in real estate deals had been stalled by the lack of insurance. Cancellations or postponements of those projects translated into a loss of construction and permanent jobs.

Bush was justified in painting this legislative effort as a jobs and economic recovery project, and a spur toward quicker economic recovery should another terrorism attack occur.

In addition to the backup, insurance companies now also are mandated to offer terrorism insurance clauses as an option in their commercial policies. Because insurers haven't yet figured out how to price such clauses, the federal government offers to act as a backstop for the next three years, until insurers can get a handle on those costs. Washington hopes to keep premium costs down, while guaranteeing insurance will be available.

There are two main justifications for that. One is that terrorism now is an act of war - which most insurers do not cover - and war is the business of the federal government. The other is that the government is not protecting the insurance industry, it's protecting consumers - much as it did a generation ago in starting the Federal Deposit Insurance Corporation to back up banks and protect consumer deposits.

It's not a free ride for insurers. The law institutes a decreasing annual cap for government assistance until the program ends in 2005, with the government covering 90 percent of the losses after an increasing annual deductible tied to insurers' commercial premiums. Hartford Financial Services Group, for example, has $4 billion in commercial premiums so it would still face a potential $400 million hit in the plan's second year - nearly two-thirds of the amount it paid out for the 9/11 attacks.

The market will still rule in this kind of insurance. Companies are still scrambling to try to calculate proper premium costs (in the interests of full disclosure, The Buffalo News is owned by Berkshire Hathaway Inc., an investment company with major insurance holdings), and commercial developers and building managers still will have to decide whether they want to pay that price.

That's as it should be in a market economy. The government now has offered enough reassurance to prime the pump, and ordered that the effort be made. That step is prudent, and far better than continuing a broken system that left an already wounded business world uninsured against terrorism.

LOAD-DATE: December 6, 2002