SECTION: Section C; Page 4; Column 5; Business/Financial Desk 

LENGTH: 981 words

HEADLINE: A NATION CHALLENGED: THE INSURERS;
Government Role at Issue In Proposal to Help Industry

BYLINE:  By STEPHEN LABATON with JOSEPH B. TREASTER 

DATELINE: WASHINGTON, Oct. 11

BODY:
As the nation's leading insurers have coalesced around an aid package to protect them against losses from future terrorist attacks, an ideological rift has developed both within the administration and in Congress about the government role in protecting industries in distress.

The conflicting advice being presented to President Bush remains a big obstacle to the passage of a bill that several lawmakers are preparing to introduce shortly, in the hopes of getting final passage before Congress goes into recess in a few weeks. While leading senators are leaning toward setting up a government-backed insurer like the one that exists in Britain, officials said that deep divisions within the administration in recent days have delayed the White House from issuing its own proposal. Industry executives say it is essential that Congress adopt an aid package because many policies expire at the end of the year, and reinsurers, who insure the insurers, have already announced their intention to pull out of the business of offering terrorist coverage.

The insurance industry -- supported by other industries that rely on insurance like lenders, manufacturers and real estate companies -- has proposed setting up a reinsurance company financed initially by the industry and backed by the Treasury. This company would soak up much of the costs associated with any large terrorist attacks.

Within the administration, the camp supporting forceful government intervention is being led by Peter R. Fisher, under secretary of the Treasury. Mr. Fisher, who has had more experience on Wall Street and in managing financial crises than any other senior Bush adviser, is said to be sympathetic to fears that the drying up of insurance could harm the economy by discouraging lending for real estate, construction and manufacturing.

But other top officials, most notably Lawrence B. Lindsey, the president's senior economic adviser, are described as being cool to the creation of a new government-backed company involved in setting premiums, and about the establishment of an open-ended liability that could cost taxpayers many billions of dollars. Concerned about the establishment of a new government bureaucracy, Mr. Lindsey wants to rely on a more market-based solution, according to people who have talked to him.

Administration officials have recently been discussing a proposal that would not set up a reinsurance company but would simply set a cap on all terrorism liability and then have the government pay the rest. Some Republicans have also been floating a tax break for insurers to encourage them to cover claims from future terrorist attacks.

In Congress, the ideological rift is accompanied by a geographic divide. Lawmakers in the Northeast, hit hardest by the attack and home to many insurers and other affected financial institutions, are more sympathetic to an aid package than those elsewhere.

Senator Chris Dodd, Democrat of Connecticut, is preparing to introduce legislation shortly that would establish a government-backed reinsurance company to issue terrorism coverage similar to the one in place in Britain since shortly after terrorist attacks by the Irish Republican Army in the early 1990's. In the House, Representative Mike Oxley, an Ohio Republican who heads the financial services committee and is more skeptical of government aid, is preparing to hold hearings next week.

This week senior executives from leading insurance companies blanketed Capitol Hill and top White House offices, making the case for the government-backed reinsurance company. The industry also circulated legislation that would sharply limit its losses in future terrorist attacks and make the government responsible for any additional costs.

The legislation would require each insurer to pay 5 percent of the cost of an attack. For a future attack with losses of $40 billion, about the size of the losses from Sept. 11, the insurers would have to pay $2 billion each, significantly more than most are now facing.

Under the proposed legislation, a company called the Homeland Security Reinsurance Company would be set up. Its capital would be created through premiums.

In the event of an attack in the first year of the company's existence, all but 5 percent of any claims would be paid by the government. Then the new company would be liable for additional claims of up to $8 billion. The government would pay for claims exceeding that limit.

Since the establishment of the insurance plan in Britain, the pool has paid claims from several attacks and the government so far has paid nothing.

But the mere commitment of the government to take on the worst cases has helped calm the British insurance market and restrain prices. American insurers say their propoposal would have the same effect. "If legislation is passed that provides for sufficient predictability, it will stabilize the market," said Joel Freedman, the director of government affairs for the Hartford Financial Services Group.

In the insurers' proposal, they would sell the terrorist coverage, keep 5 percent of the premium to match their risk and pass along the rest to the Homeland company. Once the new company had $10 billion on hand, any other premiums would be forwarded to the government. The program would be voluntary for both insurers and their customers.

The insurers say the proposal represents their best thinking on the subject, but they are prepared to compromise. "The details, to the industry, are somewhat unimportant," said Julie Rochman, the spokeswoman for the American Insurance Association, "provided that the mechanism creates the ability for insurers and businesses to get their arms around the terrorist risk. The terrorists present the industry now with potentially infinite losses. This proposal provides some predictability and limits to losses."        http://www.nytimes.com

LOAD-DATE: October 12, 2001