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01 Feb 2002

Terrorism, Insurance, and Uncle Sam

Topics: Government and Politics-National SecurityResearch-AnalysisManagement-Risk Management
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In the wake of the September 11 attacks, business in general and the insurance industry in particular are examining ways to manage the high cost of insurance against acts of terrorism. Appearing before the Senate Committee on Commerce, Science, and Transportation last October, Associate Professor David Moss was asked to consider "what role the federal government should play, if any, in indemnifying terrorism-related risks."

Moss, whose new book, When All Else Fails: Government as the Ultimate Risk Manager, traces the history of federal and state efforts in this area, told senators that "contrary to popular wisdom, government involvement with private-sector risks is nothing new." Moss noted that public-risk management goes back to the earliest days of the Republic and cited policies such as limited liability, federal deposit insurance, bankruptcy, and product liability law. Policymakers have long understood that private markets for risk don't always function adequately on their own, Moss said, adding that "involving the federal government in the management of terror-related risks would in no way constitute a radical departure from the path of American policymaking."

Moss observed that historically, federal disaster policy has not produced effective risk monitoring sufficient to curtail the kind of risky behaviors (such as reckless building) that compound losses when natural disasters strike. With that in mind, he proposed a program of federal reinsurance for terrorism-related risks that would draw on "the government's unique strengths as a risk manager without short-circuiting either the essential capabilities or the relentless discipline of the private market."

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