SECTION: FINANCIAL; Pg. E04

LENGTH: 788 words

HEADLINE: Greenspan Backs Federal Backup for Terrorism Insurance

BYLINE: Jackie Spinner, Washington Post Staff Writer

BODY:






Federal Reserve Chairman Alan Greenspan yesterday endorsed a federal backup for terrorism insurance, even though he said the economic consequences were the government to remain uninvolved were unclear.

"It may be necessary . . . for the Congress to stipulate that in the event of a terrorist attack, clearly defined as a terrorist attack, that the federal government, with some deductible, would cover the cost of that," Greenspan said during an appearance before the House Financial Services Committee.

"This is an issue which I think there is considerable dispute on it, because we don't know what the nature of what it is we are facing," he said.

Greenspan's remarks preceded a separate hearing on terrorism insurance by a Financial Services subcommittee. Policymakers are trying to decide how to respond to a shortage of terrorism insurance after the Sept. 11 attacks.

Most reinsurers, which provide backup coverage for insurance companies, stopped covering terrorism after Jan. 1, when most reinsurance contracts expired. As commercial insurance policies have rolled over, primary insurers also have stopped providing terrorism coverage to large commercial policyholders. Where coverage is available, it is often limited and very expensive.

Congress adjourned last year without enacting legislation that would have created a federal system for helping pay terrorism claims. It has not revisited the issue.

A report by the General Accounting Office, which was presented yesterday to the Financial Services subcommittee on oversight and investigations, found that the shortage of coverage is starting to affect businesses including real estate and commercial lending.

In several cases cited in the report, construction projects have been put on hold and new financing suspended.

"It is clear the current lack of terrorism coverage acts as a chill factor restraining our economy," said Rep. Sue W. Kelly (R-N.Y.), chairman of the subcommittee.

J. Robert Hunter, director of insurance for the Consumer Federation of America, said problems have been exaggerated.

He said the biggest concern confronting policyholders is higher rates, which started to increase before Sept. 11. "Are there problems in the market? Sure," he said. "But they are being resolved."

That view was disputed by others who testified before the subcommittee, including the head of New York state's insurance department, Gregory V. Serio.

"To those who were expecting a sudden and precipitous market displacement, I would like to caution that because of market dynamics, the effects of a lack of a backstop for terrorism losses may be gradual and subtle but just as detrimental," Serio said.

Kieran Quinn, president and chief executive of Column Financial Inc., a subsidiary of Credit Suisse First Boston, testified that commercial lending capacity has dramatically decreased because of a lack of terrorism insurance.

Quinn said the problem for lenders is similar to the one faced by insurers: It's difficult to assess the financial risk of another terrorist attack.

"I can assess and price the risk of a Kmart bankruptcy, or I can buy insurance against the risk of a building burning down," Quinn said. "But if I cannot assess the risk, and borrowers are unable to obtain insurance, I will not do the deal, particularly when various government officials continue to state that the chance of another terrorist attack is 100 percent."

Lisa Kramer, president and chief executive of FOJP Service Corp., a nonprofit risk manager for the United Jewish Appeal-Federation of Jewish Philanthropies of New York, said the group has been unable to find complete coverage for its beneficiaries, which include six major academic medical centers, long-term care facilities, social service agencies and community centers.

The buildings, worth a total of $ 8.5 billion, are only insured for up to $ 1 billion, and terrorism is not included. Kramer said her group was able to find just one insurer that would cover terrorism. That insurer policy would charge $ 4.2 million for just $ 50 million in coverage.

"Premiums of this size are simply not affordable," she said.

In presenting the findings of the GAO report, Richard J. Hillman, the agency's director of financial markets and community investments, said the extent of the problem is still unknown.

"But they could become potentially significant in an economy recovering from a recession," he said. "Deciding whether Congress should act to help businesses obtain insurance against losses caused by terrorism is properly a matter of public policy. The consequences of continued inaction, however, may be real and are potentially large."

LOAD-DATE: February 28, 2002