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HEADLINE: Insurance Uncertainty a Threat, O'Neill Says

BYLINE: Jackie Spinner, Washington Post Staff Writer

BODY:




Treasury Secretary Paul H. O'Neill told members of Congress yesterday that the economy is facing a "temporary but critical market problem" in the insurance industry and that without federal action "severe economic dislocation" could occur.

O'Neill said the Sept. 11 terrorist attacks created such uncertainty over how to price the risk of future terrorism that many insurers may drop coverage or institute huge price increases.

"Leaving this problem unresolved threatens our economic stability," O'Neill told the Senate Banking Committee and the House Financial Services insurance subcommittee. After Jan. 1, "the vast majority of businesses in this country are at risk for either losing their terrorism-risk insurance coverage or paying steep premiums for dramatically curtailed coverage. This dynamic can be expected to cause dislocations throughout our economy." About 70 percent of reinsurance policies -- which provide coverage to insurance companies -- expire at the end of the year. Insurers and White House officials are encouraging lawmakers to pass a remedy before Congress recesses.

The Bush administration has proposed making the government responsible for paying most terrorism claims next year and diminishing that role gradually over the next three years. The industry has proposed a separate government-backed pool to pay claims.

Members of the two congressional panels almost universally rejected the industry plan. Although both proposals were criticized, members from both parties lined up behind the administration plan -- at least in principle.

Under that plan, the government would pay 80 percent of the first $ 20 billion in claims from an attack that occurred next year and 90 percent of the next $ 80 billion.

The proposal would limit the industry's liability for terrorist claims to $ 23 billion in 2003 and $ 36 billion in 2004, the final year of the program. Insurers would pay all the losses on the first $ 10 billion in claims in 2003 and the first $ 20 billion in 2004.

Some members said they were not convinced that the federal government should pay most of insurance losses next year.

"Members would feel more comfortable if the first expense were private and the federal government were the backup rather than the federal government being on the hook for the first dollar," said Sen. Phil Gramm (R-Tex.), ranking member of the banking panel.

Others questioned whether the assistance plan could be limited to one year, which would give Congress an opportunity to revisit the issue next spring. O'Neill recommended the president be given the power to act if problems persist.

Rep. John J. LaFalce (D-N.Y.) told O'Neill that he was afraid "the insurance industry may be taking advantage of us" but encouraged Treasury officials to propose legislation.

Members of the two committees expressed confidence Congress would take some action.

"To risk not doing anything because we all can't come to an agreement could really push us down the economic ladder," said Sen. Charles E. Schumer (D-N.Y.).

LOAD-DATE: October 25, 2001