The public sector should not be considered as the main source for terrorism reinsurance, contends Douglas Holtz-Eakin, director of the Congressional Budget Office.

"The idea that the private sector can't bear these costs is misplaced," he said here at the National Symposium on Terrorism Risk Insurance.

In fact, he explained, any role played by the federal government would eventually fall onto the shoulders of the private sector anyway–either as a surcharge after the fact or in the form of increased taxes to make up for increased government spending.

He argued that the federal government's role in dealing with terrorism risk issues should be more indirect, along the lines of helping the private sector carry the load.

"The federal role," he said, "is to ask and answer the question of how to best tap the resources of the private sector."

Mr. Holtz-Eakin made his comments early last week as the life of the Terrorism Risk Insurance Act continued ticking down to its Dec. 31 expiration date.

Three speakers introduced a series of principles they said should guide policymakers as they consider solutions to the terrorism risk issue. Among the principles is that since terrorism is a national security issue, "the public sector has responsibility for making terrorism insurance widely available and encouraging its purchase."

The principles were proposed by Howard Kunreuther, co-director of Wharton Risk Management and Decision Processes; Robert Reville, co-director of the RAND Center for Terrorism Risk Management Policy; and University of Southern California Professor Detlof Von Winterfeldt.

Jacques Dubois, chairman of Swiss Re America Holding Corp., said national security concerns on the part of the government, while understandable, also make it impossible for insurers to evaluate and underwrite terrorism risk. He said the government keeps information on terrorist attacks largely classified, noting that "information is not available to the private sector and not available for insurance companies to assess the risk."

Mr. Dubois also argued for an extension of TRIA, contending the backstop has "worked," adding that it has "protected" the insurance industry and allowed for the spreading of losses and risk. However, he conceded that TRIA was crafted as a temporary solution rather than a permanent system for handling terrorism risk.

"We need to recognize that this is not a temporary issue, and a temporary solution is not a good idea," he said. The government needs to establish a permanent system. If that involves making the federal government the underwriter for terrorism reinsurance, "then let's make it so," he said.

At a separate event held by the Washington Legal Foundation last month, Warren Heck, chairman and chief executive officer of the Greater New York Mutual Insurance Company, said the main criticisms voiced against the federal "backstop" created by TRIA are untrue–namely that the backstop was preventing growth of a private market and emergence of new capital for terror reinsurance.

In fact, he said, worldwide capacity for terrorism reinsurance stands at $6 billion if you exclude nuclear, biological and chemical coverages. With those coverages, he said, capacity drops to $1 billion.

"How would that help us with losses of about $250 billion" in the event of a major attack? he asked.

If TRIA is allowed to lapse, he warned, instead of a private market growing to assume terrorism risk, insurers would exclude what they know is an unpredictable risk and therefore reduce the amount of market capacity. "A smaller private market will further expose the federal government to more losses in the event of a terrorist attack," he said

In the short term, he agreed that the deductibles and trigger levels of the TRIA program should be raised "moderately." Longer term, however, he said Congress must set up a public/private risk sharing mechanism.

"It doesn't have to be Pool Re," he said, referring to the name of the partnership in Great Britain. "But it does have to be some kind of pool. It has to have some government backing."

Lawrence Mirel, outgoing commissioner of the Department of Insurance, Banking and Securities for the District of Columbia, offered a more specific proposal for a federal pool that would have uniform premiums for all policyholders and would not be limited solely to covering terror risks.

"I don't think it matters what the cause of a loss is," Mr. Mirel said. "The trigger for an event should be the size of the loss."

Under a pool system, the amount of reserves for a catastrophic loss would rise much more quickly and could provide a better cushion before the federal government became involved, he said.

Mr. Mirel said he hoped the looming deadline would prompt Congressional action. But with other issues crowing the legislative calendar, "it's beginning to look like we're running out of time," he said.

Flag: Point-Counterpoint

"The idea that the private sector can't bear these costs is misplaced," says Congressional Budget Office Director Douglas Holtz-Eakin.

Swiss Re America Chairman Jacques Dubois says classified information on terrorist attacks "is not available to the private sector [or] for insurance companies to assess the risk."