Lawmakers study terror insurance renewal

WASHINGTON -- Homeland s ecurity specialists are warning that government-subsidized terrorism insurance -- a post-Sept. 11 program that is up for renewal in Congress -- has sapped the incentive for healthcare facilities, financial institutions, and real estate developers to take necessary precautions against terrorist attacks.

The availability of government-backed insurance means there is ``little incentive for owners and operators of our infrastructures to bolster security," according to an analysis by the Homeland Security Policy Institute at George Washington University.

The federal terrorism insurance program expires next year and is the subject of a hearing today on Capitol Hill, where real estate and insurance executives are expected to testify in favor of making the government's role in the terrorism insurance market permanent.

The current terrorism insurance program, which provides up to $100 billion in payouts in the event of a major attack, was created as a temporary measure after Sept. 11 and is widely credited with stabilizing property insurance premiums that soared after the attacks. Insurers say eliminating the program now would cause rates to rise again, threatening the economy.

``The magnitude of the risk is so huge that it basically threatens the viability of the entire insurance industry," said Chris Lewis , vice president of alternative market solutions at The Hartford. ``It's a risk that we can't underwrite and manage."

Some critics contest those assertions, and say that the program has been driven by short-term economic needs without paying enough attention to the way it affects domestic security.

Douglas Holtz-Eakin , the former director of the Congressional Budget Office, said in testimony before Congress last year that continued subsidies for terrorism insurance will have the unintended consequence of allowing firms to avoid making security-conscious decisions.

``The speed with which the nation adjusts to a sustained high level of risk might increase if the premiums charged for terrorism insurance more closely reflected expected losses," he said.

Removing the government subsidy, he said in a telephone interview yesterday, would force firms to make decisions that mitigate their terror risk, lowering the nation's overall vulnerability.

``If I'm holding the stock in X and Y chemicals and they're sitting on the dock in Baltimore, I've got to say: `Jeez, there's some chance these guys are really exposed. You're in a risky location for the kind of thing you do. Go do it in Omaha. Go do it somewhere else,' " Holtz-Eakin said.

Frank J. Cilluffo , the director of the Homeland Security Policy Institute, said economic considerations so far have dominated the discussion over the future of terrorism insurance. ``These issues are being decided by the people who know financial markets, without the homeland community having a bite at the apple," he said.

Paul Mattera, a vice president at Liberty Mutual, said concerns about the homeland security ramifications of terrorism insurance were misplaced, because insurance companies were still responsible for a large portion of losses and had no reason to write policies for companies with lax secu- rity.

``We have no interest in insuring a property where the property owner is not going to take reasonable precautions to prevent infiltration by a terrorist," he said.

Mattera said that insurers would be unable to cope with any terrorist attack using weapons of mass destruction. The reinsurance market -- a way for insurance companies to insure their own potential losses -- has largely stopped providing reinsurance on terrorism policies, he said.

Still, Steve Ellis , vice president of Taxpayers for Common Sense, a group that opposes wasteful government spending and has characterized the terrorism insurance program as corporate welfare, said the private sector is capable of shouldering more of the burden from terrorism. ``If Liberace could get his fingers insured -- and I'm not trying to be joking about something very serious -- then you can get insurance for anything, including terrorism," he said.

Representative Michael E. Capuano , a Somerville Democrat who sits on the House Financial Services Committee and supports a continued role for the federal government, said he was normally opposed to aid to the private sector but was convinced that in the case of terror insurance the need was genuine, given the potential losses involved. ``In a perfect world, the government shouldn't be involved. At the same time, I would argue, let's get realistic."

Still, some critics say that as long as there is government-subsidized insurance available, there is less reason for companies to spend money installing security cameras, training guards, or relocating to safer locations. ``Real estate people are lobbying very hard for renewal" of the Terrorism Risk Insurance Act, said J. Robert Hunter , the insurance director for the Consumer Federation of America, which opposes extending the law. ``At the same time, a lot of them aren't doing very much by way of safety enhancement."

Indeed, homeland security needs and economic incentives for firms do not always align. A report released this month by the Institute of Management and Administration, a New York business management firm, found that while 64 percent of large- and medium-sized companies surveyed have terrorism insurance, only 26 percent provide counterterrorism training to all their security staff.