Jewish World Review July 23, 2002 / 14 Menachem-Av, 5762
http://www.NewsAndOpinion.com | Congress is busting the budget and the administration is an accomplice. Explains Sen. Harry Reid, the Senate Majority Whip, "The president wants this very badly. We want it. The House wants it." What do they want? The taxpayer to pay to insure someone who builds a towering new skyscraper, huge new mall or luxurious new stadium.
The Senate recently joined the House in approving terrorism insurance, which now goes to conference committee. At least the House would require repayment of low-interest loans intended to tide over private insurers. The Senate would force taxpayers to cover 80 percent of losses up to $10 billion (minus some contribution from insurance companies) and 90 percent of everything above.
As policies came up for renewal this year, insurers started excluding terrorism coverage. Reinsurers, who help insurance companies spread the risk, began dropping terrorism coverage. But despite fevered warnings from insurers, banks and real estate firms, the construction market did not collapse, bank financing did not disappear and business did not flee from New York City. In fact, in May, the Federal Reserve reported that eight of 10 U.S. banks had seen "little or no change in demand" for financing substantial real estate projects lacking terrorism insurance. Banks said the absence of insurance was not causing them to reject projects.
In fact, despite the shock waves created by Sept. 11, markets quickly responded to new profit opportunities. Carol Loomis reported in Fortune magazine: "The premiums that insurers could charge suddenly rocketed upward into what's called a 'hard market.' ... It describes a period in which prices are high enough to potentially cover the industry's risks and provide it with something it almost never has: a decent, or maybe even good, return on equity."
Within six months of the attacks, more than $25 billion in new money poured into the industry. A flurry of new insurance companies opened in Bermuda, with the six largest alone generating $7 billion in capital.
The German firm Allianz announced plans earlier this year to create a terrorism insurance unit. Along with Zurich Financial Services, it will offer coverage in the United States and Europe. Indeed, as Sept. 11 has receded, prices have fallen and significant coverage has become available. Says Gary Mathieson, an insurance broker with Willis Group Holdings, "every day it is getting more affordable."
In April, Donald Kramer, vice chairman of ACE, declared: "Is terrorism insurable? Everybody's said no. Yet everybody's coming out with terrorism products." There are even creative alternatives. Commercial air carriers are planning to create a self-insurance fund through the industry's Air Transport Association.
All told, reports John B. Levy, president of John B. Levy & Co., a Richmond, Va., real estate investment banking concern: "For the vast majority of real estate deals, terrorism insurance hasn't been the huge issue that most people thought it would be." Although Washington, D.C., is obviously a prime terrorist target, city Insurance Commissioner Lawrence Commissioner says he's received no complaints about inadequate coverage.
Walter L. Harris, president of Tanenbaum-Harber, a brokerage firm that concentrates on large New York City buildings, reports that terrorism coverage "is available, for the most part, at a price." Mathieson estimates that the premium even for so-called trophy buildings is only one to two times overall commercial coverage.
Berkshire Hathaway's Warren Buffett has pressed for federal subsidies. Yet his company is covering Chicago's Sears Tower. The "problem," then, is that coverage is more limited and more expensive than property owners desire. Seven of 10 corporate risk managers told UBS Warburg and Mactavish Research that rate increases were "unjust" or "outrageous." Well, unjust or outrageous only if one ignores the $50 billion payout for Sept. 11, for which insurers collected astonishingly low premiums, in retrospect. Government subsidies don't eliminate risk. They only rearrange who bears it. If the Mall of America in Minneapolis, Yankee Stadium in New York or Sears Tower in Chicago become more expensive to insure, owners and customers should pay -- not taxpayers working on a farm near, say, Elkader, Iowa.
It is bad enough to put an entire industry on the federal dole. But Sen. Charles Schumer (D-N.Y.) would coddle individual companies. He pushed through an amendment providing aid not only if industry losses exceed a certain threshold, but if individual company losses exceed a certain threshold.
Warned Sen. Phil Gramm (R-Texas), "The taxpayer is exposed very, very early in the process."
Washington, D.C., abounds with crises, stoked by fevered interest groups attempting to stampede credulous politicians. So it is with the alleged crisis involving terrorism insurance. There is no crisis, only the failure of markets to work in the way that business interests and their political allies want them to work. Uncle Sam should stay out.
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