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NEW YORK, Jan. 23 -- It doesn't make sense to finance the cost of terrorism through insurance premiums, a leading stock analyst told executives attending the Property/Casualty ̽»¨¾«Ñ¡ Joint Industry Forum, held here on January 16.

"Terrorism is an attack on society," said Alice D. Schroeder, a Managing Director at Morgan Stanley. "It is an attempt to take away from everyone the right to fly on an airplane, work in high rise buildings and live in cities."

Schroeder observed that society doesn't want to send a message that people who fly or who live in urban centers are engaging in risky behavior and that they must be penalized and made to pay higher insurance premiums. By "artificially using the insurance system to charge for terrorism coverage," she suggested, "Congress is creating a disincentive for people to do these things."

Schroeder was one of three insurance experts on a panel discussing industry issues which included the failure of Congress to pass legislation creating a backstop for future insurance industry terrorism losses in the event of another attack similar to the World Trade Center disaster. That disaster is expected ultimately to cost the insurance industry approximately $40 billion.

In light of losses from the attack on the World Trade Center, reinsurers (the insurers of insurance companies) are excluding future terrorist protection. Last month Congress recessed for the holidays without agreeing on a federal terrorist coverage backstop plan, but is expected to resume consideration of the issue in the coming weeks.
Schroeder noted the industry has the capital to pay the World Trade Center losses, but another attack could leave dozens of companies bankrupt.

Kenneth A. Froot, Andre R. Jakurski Professor of Business Administration at Harvard University Graduate School of Business, took a somewhat different approach to the problem of how to pay for the cost of terrorist attacks - one that in effect would pick up the pieces after a megadisaster rather than prepare for one in advance.

Froot said that the market can handle what he called "normal terrorist risk." It would be better, he said, to leave it up to the federal government and taxpayers to step in after a major attack than to create a program "designed to sop up this exposure and take away the incentives for the marketplace to deal with it."
Michael S. Pritula, a Director of McKinsey & Company, did not believe that the insurance market could safely handle such uncertainty.

"I disagree that the market can handle these things. There's a finite amount of capital here," Pritula said.
Schroeder said that a post-disaster solution such as the one being advocated by Froot would worry shareholders of publicly-traded companies that might not be protected under such an arrangement.

On a related matter - the high cost of insurance - Froot said the markets had reacted to the terrorist attack in much the same way as they did to Hurricane Andrew and the Northridge earthquake - with a large price increase. But, he predicted current conditions will not last long because people have much more experience now.

"This cycle is going to be foreshortened in a very dramatic way," Froot stated. "Opportunities are not going to persist as long. Capital is moving much more quickly into existing institutions, and modelers are already working on revisions that include not only events by God but events by bad people."

The program was moderated by Sean Mooney, Chief Economist and Research Director for Guy Carpenter & Company, Inc.