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 arkets,
it's said, hate uncertainty. But while market uncertainly can lead
to stock volatility and negative fluctuation, uncertainty in the
operation of a business can be downright halting or fatal. Which
is why insurance plays such a vital role in our economy, providing
security in calamity and the promise of liquidity necessary for
the smooth functioning of the wheels of commerce.
Fortunately,
property-and-casualty insurers were able to cover obligations for
the estimated $40 billion in damages related to September 11. But
that may not be the case should any subsequent and comparably costly
events take place. Worse still, the availability and affordability
of terrorism insurance itself will become increasingly less likely.
The primary cause for the terrorism coverage crunch is the fact
that reinsurance companies, which back up the insurers, say they
will not renew terrorism-related coverage by December 31st, when
some 70% and trillions of dollars worth of policies expire.
Without the
liquidity and protection from re-insurers, insurance companies face
constraints against covering businesses against acts of terrorism.
Here's the result, as one magazine recently put it: "With no
coverage, lenders won't lend, builders won't build, and business
will grind to a halt."
With an already
weakened economy, the Bush administration and many in Congress understand
that, like it or not, the federal government must take some action
quickly to avert such a systemic catastrophe. But there are differences
over the scope and form of this government intervention in the marketplace.
If any plan
is to be considered a truly comprehensive solution to the problem,
it must consist of three main components:
1. It
should be temporary, focusing on keeping the economy stable through
the new year, and on providing what insurance consumers need —
not necessarily what insurance companies want — to keep businesses
moving forward with adequate assurance. On this point — and
on the need for the insurance industry to incur a deductible, or
some level of first-dollar payment for the government's backing
— there appears to be consensus. Squabbles over the size of
the deductible and just how "temporary" the short-term
solution should be are just that: squabbles — minor disagreements
easily resolved and, I believe, not nearly as essential as the next
two components of a comprehensive solution.
2. It
should protect taxpayers, requiring insurers, when they're again
able to stand on their own two feet, to pay back over time whatever
taxpayer dollars they borrowed during their short-term time of need.
Without a mechanism for repayment I personally don't see how any
proposal could be construed as anything but a blueprint for a bailout
— an open checkbook, if you will, drawn out of taxpayer pockets,
and a situation, one would think, that should also be unacceptable
to each of those taxpayers' elected representatives, whether Republican
or Democrat. In fact, I expect that most members of Congress would
react in the same way certain Democrats did to a non-repayment plan
at a Senate Commerce Committee hearing last week.
According to
the committee chairman, Sen. Fritz Hollings (D., S.C.), an ideal
federal terrorism reinsurance bill should be one that "protect[s]
the American taxpayers while providing the necessary stability to
the marketplace . . . [instead of a bill that] leaves insurance
companies unjustly enriched and the American taxpayers paying the
bill."
I rarely find
myself ideologically aligned with Sen. Barbara Boxer (D., Calif.),
but I find it hard to argue with her description of a plan that
didn't include a provision for somehow charging the industry for
federal assistance. It would be, she said, "unfair to taxpayers
and exceedingly fair to insurers," and "putting the taxpayers
in the position of being idiots — on the line for untold billions
and no source of revenue coming in."
But then, paying
back a loan is neither a liberal nor a conservative concept. Or
more precisely, it's both liberal and conservative, because it values
common sense and, above all, our common concerns of fairness for
both consumers and taxpayers — two groups rarely, if ever,
afforded the opportunity to skip out on their bills. Not surprisingly,
both the Consumer Federation of America and the Citizens Against
Government Waste, two prominent grass-roots advocacy groups, have
come out in support of the "loan-based" over the "giveaway"
approach to the insurance industry.
Some insurers,
for their part, have said that the loan-based approach will not
be effective enough to stabilize the market and allow for the availability
of affordable terrorism insurance. But such a view ignores the historical
evidence of effectiveness that government-guaranteed loans have
had as successful instruments for getting through times of crisis.
This kind of hard-nosed largesse formed the basis for the Reconstruction
Finance Corp., which helped steer businesses and whole industries
through the Great Depression, and the loan programs that rescued
Lockheed, Chrysler, and even the defaulting city of New York in
the 1970s. (For a better sense of what "hard-nosed largesse"
means, see "Liquidity
— With Strings," an excellent recent Forbes
magazine profile of Jesse Jones, the man who, with a loan in one
hand and a "haircut" in the other, managed the Reconstruction
Finance Corp. in the 1930s under the banner "no handouts.")
In each instance, federal taxpayers were paid back in full. And
in each instance, presumably because of the accountability loans
bring, the borrowers became financially stronger as a result. Which
brings us to the third component of a good plan.
3. It
should provide an exit strategy for taxpayers and point toward how
— not just when — the federal government can end its market
intervention. Hence it should provide appropriate tools to a private
market that, at the end of the day, is made healthier, stronger,
and more independent than it was when we began.
The reason
we're in this bind to begin with, remember, is that reinsurance
companies, mostly located in Europe, will no longer make their pool
of resources available for backing terrorism insurers. In the long
run, the strongest answer to the reinsurance vacuum, and the surest
way to avoid having the government serving that function indefinitely,
is to take away the barriers that keep American insurers from filling
it themselves. This could be easily accomplished by simply deferring
taxation on reserves that insurance companies can set aside and
build up exclusively for protection against future terrorist attacks.
Hardly a "tax
break" for insurance companies, which wouldn't be able to use
the money for any other purpose, it would serve as a catalyst and
incentive for an industry to end its own dependence on government.
What we certainly don't need is a situation in which taxpayers unendingly
subsidize an industry while it continues posting skyrocketing profits.
And, if we
have a plan that provides market stability without simply giving
away the taxpayers' money — one that temporarily backs insurers
without indefinitely bailing them out — what else, really,
do we need? Believe me, once government gets into the game of "sponsoring"
enterprise with taxpayer dollars, it becomes awfully difficult to
get out. This time, luckily, we can stop the game before it starts.
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