SECTION: VIEWPOINTS, Pg. A35

LENGTH: 788 words

HEADLINE: Congress Should OK Terrorism-Insurance Bill

BYLINE: By Tom Baker and Peter Siegelman. Tom Baker is director of the Insurance Law Center at the University of Connecticut and a visiting lecturer at Yale Law School. Peter Siegelman is an economist and associate law professor at Fordham Law School.

BODY:
With the recent anniversary of Sept. 11 in mind, Congress should move swiftly to complete action on a terrorism-insurance bill.

Lawmakers began quickly last September, addressing the immediate, most important needs - those facing the families and businesses of the terrorist's victims. But they moved more slowly on a program to handle future attacks. The House passed a bill early on, but the Senate didn't act until July. The House and Senate are currently trying to hammer out their differences in a compromise bill. Government-supported terrorism insurance is a good idea for two reasons. First, by promising to pay the costs incurred in future attacks, insurance provides financial security today. Second, well-designed insurance can make us less vulnerable to terrorism.

Badly-designed insurance, on the other hand, will increase our vulnerability. To see why, think about government-sponsored flood insurance. It's not that flood insurance causes bad weather. But flood insurance can increase the harm from floods by encouraging people to build in flood-prone areas. Why bother trying to reduce your risk when your insurer pays your losses?

To prevent this natural tendency to slack off when someone else foots the bill, terrorism insurance needs to act like regular homeowners' and business insurance, not like flood insurance. There need to be adequate deductibles and coinsurance, and the price should depend on the risk.

We like much of what the House and Senate would do, but neither goes far enough to encourage private business to protect against terrorism. Combining the best of both approaches would be a big improvement over either on its own.

The main problem Congress is trying to address is that insurance companies can't insure against terrorism on their own. Because the risks are so hard to assess, insurers can't be confident enough about what price to charge. This is especially true for the very high levels of coverage needed in major cities and for large business. As a result, many businesses today don't have, and can't buy, insurance against a terrorist attack.

Insurance is possible when we can't price risk in advance, but only if there is a way to collect additional money if losses get too big. Some life and fire insurance used to work this way before insurance professionals learned how to price those risks in advance. This was called assessment insurance, because people were assessed additional amounts if the premiums they paid up front were not enough to pay all the losses. Condominium associations and cooperatives use assessments to address major repairs today.

Unlike the assessment life and fire insurance of old, or the condos and co-ops of today, insurance companies can't set up their own assessment systems for terrorism risks because the potential losses are too big. They need the government to create a fund, which is what both the House and Senate bills would do.

Both the House and Senate would require insurers to cover terrorism risks, and both create a fund to help pay for high levels of damage. So far so good. But neither approach does enough to encourage businesses to protect against terrorism losses.

Both require insurance companies to pay part of the costs incurred in a terrorist attack, but the Senate sets a higher deductible that insurers must pay before the government steps in and a bigger coinsurance amount that insurers must pay even after that. This gives insurers more reason to be careful about which risks they take on. It also means that they will insist on risk-based pricing and deductibles, all of which give people a bigger incentive to do what they can to minimize terrorism losses.

But rather than pay for the terrorism-insurance fund with taxpayer money, as the Senate would do, a better approach would be to assess insurers and their policyholders to repay the fund, as the House bill does. This is the (only) good part of the House bill.

Assessments would make the people who benefit from terrorism insurance pay for terrorism losses. And assessments would give insurers and businesses a good reason to cooperate in fighting terrorism, so that one company can't do better simply by shipping the problem down the street. Also, assessments would relieve taxpayers from paying the bill.

Combining the higher deductible and co-insurance from the Senate with the assessments from the House would encourage the provision of terrorism insurance while preserving reasons for all concerned to do what they can to protect against terrorism. This way, the terrorism-insurance fund would provide real protection, at almost no cost to the taxpayer, and without the incentive to slack off that a government giveaway could create.

LOAD-DATE: September 17, 2002