Insurance companies are the right-lane drivers of corporate America. They hate risk that they can’t quantify. But on September 11, they had to begin paying on claims that will likely total as much as $50 billion for a risk they’d never calculated. That’s bad enough. What’s worse is the real possibility of billions more in potential claims if another terrorist blows up a trophy building or a cargo ship, or pumps poisonous gas into a skyscraper, a stadium or a theater. Which means the insurers will charge rates that are ridiculously beyond all proportion for protection against terrorism, or they’ll get out of the business altogether.
Now it’s a new year and about two thirds of all insurance policies have to be renewed. In states where regulators have refused so far to allow insurers to exclude coverage for terrorism, the insurers have said they’re not going to write any policies. In other states they’re excluding terrorism from basic coverage and charging back separately for it at exorbitant rates, or not covering it at all.
A skyscraper that doesn’t have complete insurance will typically be in default on its mortgages, because the banks want to know that the building that backs up the loan is secure. So the bank may foreclose–or boost its interest rates to make up for the extra risk. Or, if the building can now get insurance as a separate item, the cost will be so high that it might not be economically viable. A store or restaurant that doesn’t have worker compensation insurance, which is also affected, might have to close. And a developer who wants to build an office tower near a landmark like Rockefeller Center or the Sears Tower won’t be able to get financing without terrorism insurance, or will have to pay so much extra for the insurance that he won’t go forward.
“This could slowly but surely lead to the de-urbanization of America and the closing of any iconic buildings,” says financier Warren Buffett, whose Berkshire Hathaway company controls two insurance firms. (Buffett is a board member and large shareholder of The Washington Post Company, which owns NEWSWEEK.)
In late November, Buffett offered his own solution on the op-ed page of The Washington Post: a tax on all the insurance sold each year. The money would be put into a government fund to be used to pay terrorism claims, and, says Buffett, “insurers wouldn’t make a dime on any of it.” The plan is modeled after the successful Federal Deposit Insurance Corporation, which, in the cause of maintaining confidence in our banks, successfully set up the government to be the backstop against bank failures. Here, the cause would be not allowing terrorists, and the risks they pose to the country, to put a monkey wrench in our economy.
Meanwhile, the insurance industry and its lobbyists have pushed different one- or two-year plans in the House of Representatives and the Senate that would keep them in the business but use the government as a backstop. The government would pay (or loan, in the case of the House bill) 90 percent of any terrorism claims that exceed a certain amount ($1 billion in the House and $10 billion in the Senate) for the industry as a whole and a smaller amount per company. That way the insurers would know what they always need to know–the limits on their risk. And they could price policies accordingly. Taxpayers would be on the hook for anything above that limit.
The drawback is that, unlike the Buffett plan, this one would keep insurers in the business of insuring individual buildings and companies (up to that $10 billion limit) against terrorism, which means they would set individual rates based on their guesses of specific risks. That means a building or restaurant in the center of a great city would pay astronomically more for insurance than the same business in Peoria. Those who favor this plan argue that these businesses also pay higher rents for their prime locations, and that’s all part of the laws of a rational marketplace. The argument back is that you can’t have a rational marketplace when you can’t quantify risk rationally; besides, terrorism is an attack on our country whose costs we should all share. As Buffett put it in his op-ed piece, “Citizens of our leading cities almost certainly bear above-normal risks in the war being waged on us by terrorists. We should not impose crippling economic costs as well.”
For now, though, that debate is irrelevant. Despite the widespread feeling on Capitol Hill in December that the issue was so important Congress would do something quickly, nothing has happened yet on either idea. Buffett’s solution never got the attention it deserved because, says one knowledgeable Capitol Hill staffer, “there is no way that the Republicans are going to establish another government agency to do anything.”
As for the congressional plans, in mid-December a bill that had already passed the House became captive in the Senate to a debate about lawyers and tort reform. White House lobbyists and congressional Republicans reasoned that if the government was going to pay damage claims for terrorism, it should at least not fall victim to what they see as the abuses of plaintiffs lawyers–high contingency fees and punitive damage awards. But Senate Majority Leader Tom Daschle and other Democrats, who thrive on plaintiffs lawyers’ campaign contributions, refused to pass any bill that included those restrictions. “We love tort reform; after all, we’re insurance companies,” says Julie Rochman of the American Insurance Association, the industry’s Washington-based trade group. “But this really got in the way.” On Dec. 20, the last day Congress was in session, “we all assumed,” says a Republican insurance lobbyist, “that either Daschle or [Senate Minority Leader Trent] Lott would budge… But neither did, and the president never pushed them… This was just a one-year bill. Who cared about some small piece of tort reform one way or the other for one year?” Asked if solving the insurance issue wasn’t more important than the side issue of tort reform, a spokesman for Lott pointed out it was Daschle who had rejected a compromise that included tightly limited tort reform that had been agreed to by key Democratic senators involved in the bill. Daschle declined to comment.
Last week, with the Jan. 1 witching hour having passed, insurers and their customers began negotiating renewals, with both sides feeling trapped. When insurers feel trapped they get out, or they charge wildly. Either way, the drag on the economy will be huge, something akin to Alan Greenspan’s suddenly pumping up interest rates. “We’re looking at paying double or triple,” says New York broker Christine Sadofsky, whose clients include a prominent retailer with stores in prestige shopping and office developments. “They were in the Trade Center,” she adds, “so you know they’ll pay, but the prices are crazy.” One insurance-industry executive estimated that the extra cost for one major skyscraper he knows about could ultimately be $13 per square foot–eight to 10 times more than current premiums and a boost of about 25 percent of the building’s current rent charge. “Congress spent the last month arguing over economic stimulus,” says a lawyer-lobbyist for several business groups. “But this insurance problem–which gets blank stares when we talk to most people on the Hill–is a lot more important to the economy than the stimulus measures they were talking about.”
Members of Congress come back on Jan. 23. Unless they act quickly, Osama & Co. will have hit our economy harder than anyone could have imagined.
