Terrorism, Insurance, and Corporate Welfare

The case against the Terrorism Risk Insurance Act.

Robert J. Rhee has published a compelling paper on the Terrorism Risk Insurance Act, one of the lesser-known overreactions to 9/11. "Terrorism risk is not more severe than other insurable risks such as natural catastrophes," Rhee writes, "and a federal backstop stakes public money to protect the insurance industry, and subsidize the terrorism risk insurance premiums for commercial policyholders. The private market is capable of underwriting this risk." The law, in short, is a form of corporate welfare.

Right now the act is scheduled to sunset in 2014. But it has been extended twice already, in 2005 and in 2007, and politicians are preparing to push through another extension. With the cautious understatement that is the hallmark of her profession, Rep. Carolyn Maloney (D–Insurance Industry) declared this week that if the law expires, "economic expansion would basically come to a halt."

Rhee's study is an antidote to that sort of hysteria. Here, for example, is some revealing data about relative risks:

The aggregate losses in the years 2003–2012 from terrorism are $433 million. In comparison, U.S. insurance losses for "social unrest" during the same time period were almost double the terrorism amount: $837 million. Losses from "accidental man-made disasters" were more than 100 times the terrorism amount: $45,690 million. The losses from natural catastrophe were more than a thousand times the terrorism losses: $463,559 million. (Storms alone were $310,775 million.)…Yet insurers have covered nonterrorism losses without a comprehensive federal backstop.

Read the rest here.