SECTION: EDITORIAL & COMMENT; Pg. 10A

LENGTH: 920 words

HEADLINE: TERRORISM INSURANCE ;
Bill would cushion blow of future attacks

BODY:
They may complain about the cost of insurance, but most owners of homes, cars and businesses wouldn't consider going without it. Similarly, most insurance companies wouldn't want to go without their own insurance to help pay for unpredictable and enormously expensive losses from such catastrophes as hurricanes, tornadoes -- and terrorism.

Insurance for insurance companies is called reinsurance, and the businesses that provide it will be busy for a long time writing check after check to cover tens of billions of dollars in damages from the Sept. 11 attacks. And their customers, insurance companies, also busy writing checks, weren't totally surprised when many, if not most, of the world's reinsurers declared not long ago that coverage for terrorism, like coverage for war, wouldn't be included within new and renewed contracts. In some areas of the world, in fact, insurers at all levels routinely have excluded coverage for terrorism. The insurance industry as a whole -- insurers and reinsurers alike -- have the wherewithal to pay for an enormous portion of property, life, health, workers' compensation, business interruption and other losses on Sept. 11, but they would be more than hard- pressed to come up with the cash for a similar-sized calamity in the near future.

The potential for another terrorist attack, not just upon the United States but also upon its allies, has sent industry and government officials in this country and other nations scrambling for a way to offer some kind of insurance against such devastation.

Congress has come up with several different plans, including one passed by the House last week. One Senate measure resembles a proposal being pushed in other countries, including Australia, that calls for insurance companies to pay fees into a pool, maintained by the federal government, which would become, in effect, the reinsurer against terrorism. A similar plan has been in effect in Britain, which established it to deal with attacks by such groups as the Irish Republican Army.

Another Senate plan makes insurers responsible for the first $10 billion in losses, after which the government and industry would share coverage, with the government paying 90 percent and the industry 10 percent.

Under the House bill, the government would have to cover, for at least a year, 90 percent of losses related to terrorism over the first $1 billion, and insurance companies would pay the balance.

In most of the bills, the industry would be expected to reimburse the government for its losses, probably through extra fees collected on each policy sold.

The urgent need for some bill of this type cannot be overstated, because about 70 percent of contracts with reinsurance companies, many of which are multinational corporations, come up for renewal on Dec. 31. Such contracts won't include terrorism coverage. Without some other means to insure businesses and people against the losses from damages caused by terrorism, the economic slump will worsen. The primary insurance companies, those that sell policies to businesses and individuals, either would have to cease covering terrorism or raise rates on such coverage so high that it would be unaffordable.

This is because rates are based on losses that are basically predictable. For example, every year a certain number of houses are likely to burn, a certain number of people are likely to die in auto accidents and so forth. But how do you predict where and how often terrorists will strike and the extent of the damages? Do you charge higher insurance rates just on businesses and occupants of skyscrapers? Or just on airlines? And if you did, these rates would be so prohibitive as to render tall buildings unusable and ground the airlines.

Construction companies, new businesses and companies wishing to expand are among the many enterprises that would have difficulty operating without affordable coverage that included protection from terrorism. Even consumers eventually could feel the pinch, as prices for products made by affected companies rise and as insurers begin charging higher premiums on policies for homes near airports or in high-rise buildings.

The estimates being bandied about for the total tab the insurance industry will pick up for the Sept. 11 terrorism make all catastrophes seem insignificant in comparison. Conservative estimates put the figure at $30 billion, equal to or greater than the annual budget of many states and small countries. And others have predicted the cost will reach $75 billion.

The most expensive disaster to this industry to date was Hurricane Andrew, in 1992, which cost $15.5 billion and put a dozen or so small insurance companies out of business. Without a doubt, some insurance companies are destined to go under because of Sept. 11, particularly since industry members have pledged not to invoke any terrorism-exclusion provisions that may appear in existing policies.

An insurance analyst for Morgan Stanley wrote in a report published soon after Sept. 11, "We would call it close to a 100 percent probability that some reinsurer will fail and be unable to pay claims as a result of this event."

No price can be put on the loss of lives, but prices are being put on many other losses on Sept. 11, and the prices are without precedent.

As sad as another tragedy of such proportions is to contemplate, the insurance industry and all its customers need help from governments around the world to prepare for that possibility.

LOAD-DATE: December 8, 2001