So how desperate is the plight of the industry? Clearly, not as desperate as it was when the idea of a federal facility was first championed. And all of this debate begs the fundamental question that Congress should be asking itself: Is it wise policy for taxpayers to pony up money to solve an insurance market problem that seems to be correcting itself through regular market forces?

The arguments in favor of such a facility have been promulgated for months. Perhaps it's time to look at the evidence on the other side of the ledger that suggests a government already facing the prospect of mounting red ink may be offering too much money that is needed elsewhere.

Certainly J. Robert Hunter, a former Texas insurance regulator and the current director of insurance at the Consumer Federation of America, believes the current legislation is misguided. "Surveys indicate that 75% of companies have found adequate terrorism insurance coverage, and except for high risk targets, the cost is about $300 for $1 million of coverage. Hey, I'd like to get that rate on my homeowners insurance," Hunter says. "This is a case where the insurance industry is trying to privatize the premiums and socialize the claims. The industry is looking to take in the premiums and have taxpayers pay 80% to 90% of the claim costs. If this bill passes, the insurance industry basically gets free reinsurance."

Admittedly, the various bills in Congress seem to be rather generous in what they propose to cover. The current basis of the Senate version of the legislation, which has yet to be voted out by the Senate banking committee, would provide a $10 billion cutoff for industry losses. At that point, government funding would kick in. The House already passed a bill, which is even more liberal in its numbers. It would cover 90% of terrorism-related losses exceeding $1 billion, up to $100 billion. The catch that the industry doesn't like in this version: Funding would be recouped by an assessment on insurance companies and/or a surcharge on policyholders. Either way, average citizens/taxpayers still bear the burden, since inevitably there would be pass-through costs somehow added to premiums, in what would be a relatively regressive tax. The Senate bill is a less messy, less controversial fix from the industry's point of view. The Bush administration also backs the Senate version.

A Little Perspective

Are these numbers at all realistic? To gauge that, one needs to take a look at other tragedies. For instance, in 1992, Hurricane Andrew cost insurers $15.5 billion, about $20 billion in today's dollars. In 1994, the Northridge, Calif., earthquake ran up a claims tab of $12.5 billion, or $17 billion today. Given the triggers, one might wonder if the government shouldn't also be setting up funds to cover losses from potentially devastating storms or earthquakes. Many reinsurers went bankrupt after Andrew, a more severe industry casualty list than the one emerging after 9/11.

Yet, despite the inevitability of another major hurricane or West Coast earthquake, the insurance industry has chosen to provide insurance for these without government support. Asked why carriers take on these risks and balk at terrorism, Robert Hartwig, chief economist at the New York-based Insurance Information Institute, claims that "the probability of loss and the potential of severe loss is much higher" from a terrorist attack. Yet, estimates on potential losses from a magnitude 7 earthquake in Los Angeles run as high as $58 billion, with an 8.2 quake in San Francisco costing an astronomical $84 billion. Add to that the fact that it is hard to imagine a loss from a terrorist attack more devastating than the demolition of two of the tallest buildings in the world, save perhaps a nuclear or biochemical assault. But even if the actuaries back Hartwig's contention, doesn't that at least argue that the House and Senate should be setting the bar much higher for a triggering of government guarantees?

Perhaps terrorism insurance should be provided directly by the government, as flood insurance is provided to homeowners and businesses throughout the Midwest. Since 1967, when the industry decided the risk was too great to underwrite, the government has completely assumed inland flood risks, though individual policies are marketed by agents. To the insurance industry, floods–that "can occur over hundreds of thousands of square miles simultaneously," as Hartwig explains it–and terrorist assaults carry the threat of similarly massive potential losses. So why not share some of the same advantages? By administering the program, the feds might have to cover all losses, but they would also collect the bulk of premiums, which could even turn the program into a moneymaker.

Another reasonable criticism of the government backstop: It is being offered on all terrorism insurance rather than on the policies where the risk of tremendous loss is, in fact, the greatest and where insurance is difficult to secure. Recently, for instance, the Durst Organization, a New York real estate company, was said to have run the risk of defaulting on the mortgage for its two-year-old Conde Nast building at 4 Times Square because it lacked terrorism insurance. Durst had obtained a $430 million mortgage and bought an all-risk insurance policy to cover the building, as required by the lender. Its new policy, however, excluded acts of terrorism, prompting the loan administrator to declare the building in default of its agreement.

Hunter says he is not opposed to government reinsurance for "truly" uninsurable risks. "I can see that some companies in New York City and other major urban areas will have trouble [getting insurance] for trophy buildings or in cases of new construction," says Hunter. "I believe taxpayers will accept that. But I don't understand why Joe's Pizza Parlor needs government intervention. A market for this insurance is growing daily."

And despite industry protestations to the contrary, there is evidence that things are beginning to regain some equilibrium. The standalone market began with three insurance facilities–American International Group Inc., Lloyd's and Berkshire Hathaway Inc.–offering no more than $100 million to $150 million in financial protection against terrorism losses. That was in January. Hunter contends up to $1 billion in insurance is obtainable now, though insurance brokers say $500 million is more likely the case. "I would agree that this is a market that has come back more aggressively in the last couple months," says Gary Mathieson, president and CEO of Willis Risk Solutions NA, a New York-based insurance broker.

Mathieson concedes that insurers are selling terrorism insurance, either through standalone policies or standard property and liability policies. His boss, meanwhile, says there is now concern that some insurers have accumulated too much terrorism risk. "Several insurers took advantage of the demand and wrote terrorism coverages that are now accumulating for them," says Joseph McSweeny, chairman and CEO of Willis Global Risk Solutions. "I understand that these companies are having problems continuing to write more coverage, which may create availability issues for buyers whose insurance policies renew in the third and fourth quarters of the year."

Is There Enough?

It is this potential shortfall in insurance coverage, says Hartwig, that begs government intervention now. "You cannot expect the insurance industry to be the last recourse for a risk that is so gargantuan in nature," he argues. "Right now, the U.S. insurance industry's capacity to absorb loss is about $80 billion. That rainy day money has to pay for all unforeseen eventualities, ranging from the mundane like fender benders to more acute problems like asbestos claims and large jury verdicts in mold cases. Add to that the cost of hurricanes and earthquakes. Is it possible to drain another $50 billion from that for another Sept. 11 and not expect adverse consequences? Absolutely not." Then again, it would be difficult to drain enough to cover a major quake in L.A.

Meanwhile, the reinsurance sector is also interested in getting back into the game, which could provide support for more expansion among insurers. Although global reinsurers across the board said they would no longer assume terrorism risks from primary insurers in the weeks following Sept. 11, their posture has changed. "By January, reinsurers had softened their positions," says Sean Mooney, chief economist and principal at reinsurance broker Guy Carpenter & Co. in New York. "While they still put terrorism exclusions in their treaties, they now will 'write back' this coverage for personal lines and small commercial lines. If an insurer seeks reinsurance for a book of homeowners business in Iowa, re-insurers no longer see this as a problem."

Some reinsurance also is available to insurers of the nation's largest multibillion dollar companies. "The standalone terrorism insurance market is growing, and yes, there is reinsurance for that market," Mooney says.

In Washington, there is the usual partisan bickering. At present, the Senate is divided over tort reform provisions inserted by Republicans. The liability provisions would disallow punitive damages against U.S. businesses that failed to protect adequately against a terrorist incident. Democrats are balking, with one insurance industry lobbyist in Washington claiming Senate Majority Leader Tom Daschle (D-S.D.) "won't bring a bill to the floor that limits the ability of victims to seek damages. The wild card now is what the Bush administration will do–will it insist on a bill even without liability protections for companies? This thing is just so screwy."

'Vital Lubricant'

Not a bad conclusion. Another terrorist attack would inevitably make the issue moot. The federal backstop would be enacted–of course, at that point, the industry would be running for cover again. In the absence of another incident, Hartwig argues that the reinsurance facility would encourage more carriers to jump back in, increasing competition and lowering premiums. He also claims that while insurance companies will do better than originally expected this year, they will not outperform other multibillion-dollar concerns. "This is not a government bailout of an industry," Hartwig says. "This is a matter of ensuring that a vital lubricant in the world's largest economy remains available at affordable prices for all who wish to purchase it."

But are taxpayers now expected to provide the capital to help business improve margins and financial performance? "I find it interesting that when insurers have trouble, they go to the government and say, 'We need help,'" says Birny Birnbaum, executive director of the Center for Economic Justice, an Austin, Texas-based consumer advocacy organization, "instead of saying our situation has changed and we need to modify our business model." Is this any way to run a free market economy?