As Risks Soar, Insurers Seek Washington’s Help

WASHINGTON —  When the airline industry went to Capitol Hill after last month’s terrorist attacks, it wanted help getting back to doing its job--transporting people and packages. When the insurance industry heads there today, it will be looking for something more--getting the government to do part of its job.

The difference is causing consternation among some lawmakers and raising worries about just how far the economic ripples from the attacks on the World Trade Center and the Pentagon will extend. By now, everyone from travel agents to real estate developers has appealed for government assistance.

What distinguishes the insurance industry from, say, the airlines is that it is asking Washington to help it perform its central function, which is to bear and manage risk. When a company sells you a fire insurance policy, it is taking on the risk that your house will burn down in return for a premium payment.

“That’s what they do, they buy risk,” said House Majority Leader Dick Armey (R-Texas), who opposes government assistance. It’s “their whole reason for being.”

Insurance executives counter that the dangers exposed by the attacks are so unimaginably costly that no single company or industry could be expected to bear them alone. They warn that, without assistance, they no longer can provide coverage for catastrophes such as the suicide airliner crashes that demolished the World Trade Center towers in New York. And without coverage, much of the economy could come to a halt.

“Tragically, our world has changed, and we’ve discovered risks we didn’t even know were there,” said Robert E. Vagley, president of the American Insurance Assn., the property and casualty industry’s principal trade group.

The insurers have won some powerful allies in their drive for assistance.

Virtually the entire real estate industry has lined up behind them. A coalition of nine major real estate groups warned President Bush by letter on Oct. 8 that, without federal action, “the ability to finance, buy or sell properties across the nation may be at risk.”

Sen. Christopher J. Dodd (D-Conn.), whose state is home to many of the nation’s largest insurers, is pressing legislation to create a “reinsurance” company--effectively an insurance company for insurance companies--to cover future terrorist attacks. He would allow the firm to turn to taxpayers if it ran out of money.

“This isn’t about a single interest but about the national interest,” Dodd said Friday. “Our nation’s economic future is something we ought to be willing to underwrite.”

The administration floated a more limited alternative over the weekend. Officials said that the government would temporarily cover 80% to 90% of the losses from terrorist attacks but that there would be no new company such as suggested by the industry and that the aid would be limited to three years rather than the six or more being sought by the industry.

If either proposal is approved, the insurance industry would be the second after the airlines to win major new federal aid as a result of the terrorist attacks.

Even some industry critics say that some kind of federal assistance is necessary. “I don’t see that we have much choice,” said David Schiff, publisher of Schiff’s Insurance Observer, a New York publication. “These companies don’t have to write coverage, but if it’s not written, things are going to fall apart.”

Nevertheless, many observers are deeply skeptical about the industry’s proposal. The reasons can be seen in a review of several other instances in which government has had to step in to guarantee that insurance remained available.

The industry says it wants to model the new effort after a British reinsurance fund established after bombings in London in 1993 and 1994 by the Irish Republican Army. Industry spokesmen pointedly note that there never has been a claim against the fund, suggesting that the new arrangement could well prove cost-free.

But there were plenty of claims and costs in three instances closer to home. And, although the expenses ultimately were borne by industry, it was only after tough government action, considerable economic upheaval and some good luck, according to participants.

In two of the cases, participants said, companies abandoned certain areas of coverage as too risky only to return several years later but in a fashion that made it difficult for state and federal programs to continue operating.

In the wake of the 1994 Northridge earthquake, companies dropped earthquake coverage and, in many cases, all forms of homeowners insurance. In response, the state went into the earthquake insurance business by creating the California Earthquake Authority. It now provides about two-thirds of the residential coverage in the state.

But, according to people familiar with its operation, the authority is encountering problems because private insurers are beginning to sell earthquake insurance again, but only to the lowest-risk homeowners.

The practice, known as “cherry-picking,” undermines the first principle of insurance, which is that risk should be spread across the largest possible pool of policyholders, with a substantial range of risk levels.

“There are early signs the private industry is coming back and cherry-picking,” said Brian V. Perkins, a consultant to the state Senate Insurance Committee. “It’s a big concern to the authority board and the Legislature.”

The story was similar in Florida, where home insurers sought to abandon the state in droves after Hurricane Andrew hit South Florida in 1992. State officials blocked companies from leaving for nearly two years, while they set up what amounted to a state insurance company, the Florida Residential Property and Casualty Joint Underwriting Assn.

At its height, the association insured almost 1 million homes. But as private companies returned to the state, it dropped to fewer than 60,000, according to its executive director, James W. Newman.

Newman said the agency continues to insure homes in Broward, Miami-Dade and Palm Beach counties, which are considered most prone to damaging hurricanes, and the number of policies is climbing again--it’s now at 86,000--as insurers, experiencing trouble elsewhere, have grown newly cautious and are shunting higher-risk cases to the association.

“I’m not happy about the trend,” Newman said of the recent increase, because it shows that the private insurance market is not doing the job.

Insurance executives insisted last week that the industry would not try to cherry-pick a government-backed terrorism insurance system. Private insurers, they said by way of example, would provide coverage for low-risk Iowa farmers but not for high-risk New York skyscrapers.

“The philosophy is ‘in for a penny, in for a pound,’ ” said Frank W. Nutter, president of the Reinsurance Assn. of America, the trade group for major U.S. reinsurance firms. If a company that provides private property insurance wants to provide the terrorism portion for even one client’s buildings through the government program, it must put all of the buildings it insures into the program, he said.

But Nutter conceded that draft legislation circulating Friday did not include any requirement that firms do so and that there would be no provision to prevent cherry-picking. “That’s going to have to be addressed,” he said.

Finally, there is the case of the “riot reinsurance program,” a federal initiative undertaken in the wake of the urban riots of the 1960s that has parallels to the current proposal but which has gone almost entirely unmentioned by the industry.

The reason, according to J. Robert Hunter, the program’s former director who now is with the Consumer Federation of America, a Washington consumer group, is that it required companies to provide urban residents with property insurance in order to be eligible for reinsurance and it regulated the rates they charged for those policies.

“It was not terribly popular with the industry,” Hunter said. The program was shut down during the mid-1980s. Hunter said there is a need for a new program for terrorism but lambasted recent plans being advanced by the industry as financially unsound and unfair. Among other things, he said, a recent draft of the measure would leave the government and U.S. taxpayers on the hook for all terrorism risks for a year while the government-backed reinsurance company was being organized.

“Those costs could be astronomical,” warned Steve Blumenthal, an analysts with Schwab Capital Markets in Washington. “They’d constitute a ticking time bomb ready to destroy any fiscal policy the government might have.”

The industry’s proposal does not involve property insurance claims stemming from the Sept. 11 attacks, which it is estimated will run from $30 billion to $60 billion, but only costs of any future terrorist acts. Industry executives have pledged to make good on the costs of last month’s tragedy.