Just Say No to a Bailout
Let’s lend a hand, not a handout, to the insurance industry.

Rep. Baker is chairman of the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises
November 7, 2001, 8:00 a.m.

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.