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Backstop Or Bailout

Immediately after the Sept. 11 attacks, a federal reinsurance facility made sense for struggling insurers. Today, as the sector recovers, the need isn't so clear

By Russ Banham | Updated on June 01, 2002

President Bush wants it. So do Federal Reserve Chairman Alan Greenspan, the U.S. House of Representatives, much of the U.S. Senate and the entire commercial insurance industry. Ditto groups representing real estate interests, banks and retailers. Just about everybody seems to want it. It’s right up there with Mom, apple pie, the New York Fire Department and the flag–making it almost unpatriotic to oppose it.

“It” is a government-backed reinsurance facility to absorb the brunt of financial losses from another mega-terrorism incident like Sept. 11. The World Trade Center attack caused an estimated $38.2 billion in losses for the U.S. insurance industry, a tally that forced some reinsurers to the brink of insolvency and put the entire niche in peril. Unable to purchase reinsurance to spread their risk of loss, commercial insurers simply stopped offering terrorism coverage, essentially forcing companies to bear the risk burden on their own balance sheets. Hence, the notion of a federal reinsurance facility: If the government absorbed insurers’ catastrophic terrorism losses, the industry would continue to provide coverage.

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