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Greenspan: Private insurers cannot handle terrorism risk alone

According to the following article from Reuters, U.S. Federal Reserve Chairman has spoken up on the issue of terrorism insurance. In short, he states that the risk of huge losses from terror attacks are too great for private insurance markets to handle, and some form of government backing must be involved. "I think that what Congress has got to do is to recognize it's a trade off -- that is, so long as we have terrorism that has the capability of a very substantial scope of damage, there is no way you can expect (the) private insurance system to handle that," Greenspan told the House of Representatives Financial Services Committee. We at Toomre Capital Markets wholely agree with Chairman Greenspan's view, especially in light of the poor historical returns the P&C markets make on their invested capital (without the terrorism claims). One can only wonder what type of premiums might be charged to prepare for a low probability, but extremely costly terrorism event, especially when there is so little historical data upon which to develop even somewhat accurate claim estimates.

Greenspan's comments come as Congress weighs whether to extend the Terrorism Risk Insurance Act, or TRIA, passed soon after the Sept. 11, 2001, attacks to help cover losses from terrorist attacks. Under TRIA, insurers must make terrorism insurance available and the government guarantees it will reimburse insurers for 90 percent of losses above certain thresholds. The law expires Dec. 31, and the property and insurance industries have urged Congress to extend it. But the Bush administration opposes TRIA in its current form, saying taxpayers' potential liability must be decreased if the program is extended.

While Greenspan said government backing is necessary, he said Congress should take care to not go too far. "We have to be careful in creating whatever we do in a government insurance or reinsurance to make certain we do not go beyond the point which is necessary, because obviously everybody likes free goods ... But I don't see how we can avoid the issue of a significant segment of government-backed reinsurance in this particular area," he added.