NCJ Number
192115
Date Published
2001
Length
22 pages
Annotation
This paper presents testimony before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises and the House Committee on Financial Services on terrorism insurance options.
Abstract
The events of September 11, 2001, brought to light numerous areas of concern within the financial sector. One issue voiced by various industry groups and Congress is how the insurance industry should respond to risks posed by potential terrorist attacks and the extent to which the government should play a role alongside the industry to address these risks. Prior to September 11th, insurance coverage for losses from terrorism was included as a normal feature of insurance contracts. According to industry analysts, this was because insurers’ experience suggested that domestic exposure to terrorism, both in the number of occurrences and the magnitude of losses, was limited. The September 11 attacks have changed insurers’ perception of their potential risk exposure. Insurance companies have indicated that they will pay their share of the losses from these tragic events. However, both insurers and the reinsurers who share the industry’s risks have indicated that they don’t know how much to charge for this coverage because they can’t predict future losses. As a result, it has been reported that industry leaders may exclude insurance for terrorism from future insurance contracts unless the Federal government provides some form of assistance to the industry. A financially strong insurance industry is essential to the smooth functioning of the economy. Any mechanism established by the Federal government to support the ability of individuals and businesses to get insurance for terrorist acts should address several significant concerns. Most importantly, the program should not displace the private market. Rather, it should create an environment in which the private market can displace the government program. Second, it should be temporary, at least initially. Finally, any program should be designed to ensure that private market incentives for prudent and efficient behavior are not replaced by an attitude that says, “Don’t worry about it, the government is paying.” This testimony presents (1) features of several existing insurance programs, both domestic and international; (2) alternative mechanisms for funding insured losses; and (3) some broad principles or guidance that the Congress may wish to bear in mind as it considers possible ways to support the insurance industry in case of future catastrophic losses due to terrorist acts.