Insurance Industry Aid Deemed Critical, But Not Coverage For All Americans

2 November 2001

Paul O'Neill looked grim the other day as he told legislators that calamity lies ahead. "If Congress fails to act" to stabilize the insurance industry, he warned, "the vast majority of businesses in this country are at risk for either losing their terrorism insurance ... or paying steep premiums for dramatically curtailed coverage."

In other words, American business as a whole will suddenly be just like those unlucky souls with preexisting illnesses who can't get health coverage at a price they can afford. "Welcome to the club!" America's luckless might say.

I'm not saying this (merely) to rabble-rouse; the truth is that Congress does need to put a terror insurance backstop in place, and fast. All I'm saying is that as we rush to spread the financial risk of terror to secure the economy, we should reflect on why we remain the only advanced nation unwilling to spread the financial risk for something as basic to human dignity as health care.

But start with the cost of terror. Losses from Sept. 11 may run as high as $70 billion. That's more than the damage from Hurricanes Andrew and Hugo, the Northridge and Kobe earthquakes, and two major recent windstorms in Europe combined.

Before Sept. 11, the risk of terrorism in America was seen as so remote that insurers basically threw in the coverage as a freebie, not charging firms a separate premium that would fund a reserve to cover losses. As a result, explains Wharton Business School insurance professor Jerry Rosenbloom, while the industry has about $300 billion in capital, the portion of that capital not held in reserve for other predictable losses is more like $125 billion.

The good news is that this means the bill from Sept. 11 can easily be paid. But you don't need to be an actuary to know that another attack or two at $70 billion a pop could push the industry to the brink.

The key to insurance is the ability to quantify risk in order to price coverage properly. If a risk can't be quantified, it's not insurable. At this point, needless to say, it's hard to run the numbers on al-Qaeda.

Insurers are thus hiking premiums through the roof. Chicago, for example, just got word that its policy for terror-related losses at O'Hare and Midway airports will cost 29,000 percent more per dollar of coverage to renew. (That's not a typo.)

Without knowing their collateral is insured in the event of disaster, banks won't finance pipelines, airplanes, power plants, shopping centers, office buildings and more. As management guru Peter Drucker once noted, "It is no exaggeration to say that without insurance, an industrial economy could not function."

The answer is some form of temporary federal backstop for terrorism losses. This is hardly unprecedented. The feds did precisely this for urban property insurance after the riots of the 1960s. In post-Northridge, Calif., you can only buy earthquake coverage from the state.

The British and Israeli governments, meanwhile, play similar insurer-of-last-resort roles for terror. And there's a good chance federal intervention can be short-lived, as insurers adjust to what will (hopefully) be a more quantifiable new world in a few years.

Still, let's be clear about what breeds urgency here and not elsewhere. When you're Too Big To Fail, you've got government by the ... well, you know. The corollary, of course, is that too many Americans remain Too Small To Worry About.

This explains why Paul O'Neill has the gall to urge the President to veto any stimulus package that gives unemployed workers help in paying their health insurance premiums. In a perverse way these political realities could give the age of bioterror a silver lining. Future scares involving communicable diseases, after all, might make it systemically risky to leave 40 million of our neighbors outside an organized system of preventive care. Isn't there a Democrat out there with the wit to cook up a National Security Universal Health Care Act?

Congress won't get to this in the next month, of course, as it takes up terror insurance. All of us ought to feel some shame in that.

Matt Miller.
Published in the Philadelphia Inquirer.
(c) 2001 Philadelphia Newspapers Inc.

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