Why Should the Government Subsidize Terrorism Insurance?

Just before Christmas President Bush signed into law a second extension of the Terrorism Risk Insurance Act of 2002 (TRIA). This Act hasn't gotten a lot of press, but it provides a pretty substantial subsidy for the insurance industry. In non-technical terms (because the technical terms are so complicated that one needs a slide rule, a pocket protector, and several actuarial tables to understand the terms completely), under this Act the government requires all commercial (not residential) property/casualty insurers to offer insurance for terrorism risks. In exchange, the government agrees to pay 90% of all losses over a certain amount (determined by a complex formula) that result from certified acts of terrorism. In short, the government provides reinsurance for commercial insurers in the case of a terrorist attack. But unlike normal reinsurance agreements, commercial insurers pay nothing up front for the reinsurance. They get to distribute their risk free of charge. Rather, if an act of terrorism occurs, and the insurance industry pays out over their limit, and the government is forced to pony up some cash, then the government has the right to recover its costs from future premiums received by the insurance companies.

Two things puzzle me about this Act: why we need the government to provide this service and why the government is providing this service for free.

The common justification for this act is as follows: Without insurance for terrorism, there would be significant disruptions in certain sectors of the economy and this would have an adverse macroeconomic impact. Insurance companies won't provide terrorism coverage because terrorist acts are not probabilistic and are thus uninsurable. That is, insurance companies claim that they cannot provide terrorism insurance because they cannot predict how often terrorist attacks are going to occur or how large the impact will be. Thus, the government has to step in to force insurers into the market.

But this doesn't make sense to me. Certainly we have enough data to make some guess about the costs and frequency of terrorism, and insurance companies can price their products based on that information. Moreover, although it is certainly a possibility that an attack will be so large as to make insurance and reinsurance impossible (e.g., the entire country is leveled in fell swoop), most insurance and reinsurance companies should be able to create a portfolio large enough to eliminate most of the concerns about the size of the attack. Please take a look at this article by Dwight Jaffe and Thomas Russell for a more thorough explanation.

Even if one believes that government should step in to this market, it is unclear why the government is providing this service for free. In any other insurance context, the insured has to pay a premium to receive the security that someone else will step in to pay some of the insured's losses. Here, the insurance companies are paying nothing up front. The government is taking the entire risk. This is quite a subsidy for insurance companies. I assume that this is being factored into the price of the insurance products being offered, but that just seems like another subsidy for business and industry. Remember, there is no requirement under TRIA for insurance companies to provide residential terrorism insurance.

Yet this bill has created a bit of a topsy turvy world in D.C.: The Dems are on the side of the insurance industry and big business and the Republicans are against. What am I missing here?

Posted by Rick Swedloff at 11:16 PM | Comments (5) | TrackBack

Welcome to the Disciplinary Corporation

The market has done a characteristically fantastic job of "trimming the fat" at nursing homes--i.e., squeezing out more profit by providing less care. One may wonder, how do the residents of such homes get taken care of when staff are fired and other corners are cut? The WSJ reports on one solution: drug them.

Nearly 30% of the total nursing-home population is receiving antipsychotic drugs. . . . In a practice known as "off label" use of prescription drugs, patients can get these powerful medicines whether they are psychotic or not.

Federal and some state regulators are pushing back, questioning the use of antipsychotic drugs and citing nursing homes for using them in ways that violate federal rules. New York has increased its focus on antipsychotics in nursing homes, training inspectors to spot signs of medication abuse.

Meanwhile, some employees are finding their health increasingly managed by their employers. "Employers Tell Workers To Get Healthy or Pay Up" is the headline, and here are some of the pressures:

Employees at some companies who are overweight, smoke, or have high cholesterol, for instance, and who don't participate in supplementary wellness programs, will pay more for health insurance. In extreme cases, employees' insurance deductibles could rise by $2,000.

What I wonder is: will the same people who are so distressed by the possibility of government-mandated purchase of health insurance also rise up against the corporate imposition of health standards? Or is paternalism perfectly fine when it's a product of the market?

Finally, I highly recommend Frederick Crews's piece on the increasing pressures to conform one's personality to a sanguine norm. Observing some trends I noted in a review of a book on the pathologization of shyness, Crews notes that we are entering a world "in which convictions, perceived needs, and choices regarding health care are manufactured along with the products that will match them." Here's one part of a fascinating review:

[E]pisodic sadness has always been a socially approved means of adjusting to misfortune and that much is lost, both medically and culturally, when it is misread as a depressive disorder. Yet [DSM-III] has propagated that very blunder by failing to clarify the difference between environmentally prompted moods—those responding to stress or hardship—and dysfunctional states persisting long after the causes of stress have abated. In no sense, however, can that indictment be confined to just one disorder. The Loss of Sadness [a book reviewed by Crews] implies that nearly every nonpsychotic complaint is subject to overdiagnosis unless contextual factors—familial, cultural, relational, financial—are weighed in the balance.

As I have suggested in Technology, Competition, and Values, we cannot ignore how "financial factors" play into our pathologization of certain ways of thinking, feeling, and acting. If Medicaid were funded adequately, perhaps we could properly pay the number of staff necessary to treat elderly nursing home residents as people in need of care, not sedation. Perhaps a universal health care system would excuse employers from the terrible choice the market forces on them: avoid sick workers or face a competitive disadvantage vis a vis the companies that do. And finally, perhaps a society with less pressure to "sell oneself" would give the shy, the sad, and the anxious a little breathing room to explore many alternative routes to well-being.

Image Credit: Wikipedia, Bentham's Panopticon.

Posted by Frank Pasquale at 06:34 PM | Comments (2) | TrackBack