Insuring Against Terror? PDF Print E-mail
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112 Yale L.J. 2509 (2003)

The current Act reflects the political reality of concentrated interests of insurers and businesses. This group had the influence and the platform to push for the government's assumption of much of their terrorist risk exposure. The Act disproportionately assists the insurers and affluent property owners who face the highest risks from terrorism, yet it contains significant safeguards that limit the potential for rent-seeking and distorting effects on participants' behavior. The Act's reliance on market pricing limits rent-seeking by subjecting prices to market discipline. The use of copayments reduces moral hazards. The employment of deductibles limits the burden shifting to the government primarily to catastrophic terrorism risks. These advantages do not eliminate the upward redistribution, which would be inevitable in almost any government solution to address terrorism risks that by nature disproportionately affect the affluent. Nonetheless, the Act serves as a politically and economically viable solution that partly addresses the substantive economic challenges facing terrorism insurance, yet limits the potential for abuse and further extension of rents for the three-year term of the plan.
 
The threat of terrorism is one that is likely to be with us so long as the United States maintains its global role. If terrorist threats continue to remain perceived as real and substantial, entities facing high terrorism risks will have both the incentives and likely the political means to continue to secure government rents by reducing their risk exposure. Changes two to three years hence at the expiration of the Act's program will obviously be contingent on the degree of perceived threats. Policymakers should work within political constraints on continuing to increase deductibles and copayments. This approach would reduce implicit subsidies and move the reinsurance plan toward primarily serving as a liquidity device for catastrophic terrorist attacks. Even in its present form, however, the Act is a significant step forward in the design of government insurance programs. It serves as a model of how, even in the context of overwhelming rent-seeking pressures, policymakers can incorporate market safeguards that limit the distorting effects of government intervention.