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Insurance crisis 'is threat to American economy'

War on terrorism: Insurance

Philip Thornton,Economics Correspondent
Thursday 25 October 2001 00:00 BST
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The American economy faces a "temporary and critical" threat to stability from an insurance crisis triggered by the terrorist attacks, the US Treasury Secretary Paul O'Neill said yesterday.

Mr O'Neill said the "vast majority of businesses" faced losing terrorism insurance or else paying huge premiums after 1 January next year unless action was taken.

The Bush administration has recommended the government shares up to 90 per cent of terrorism-related insurance losses above $20bn (£13.8bn) in 2002. The plan has run into opposition among Republicans, who are sceptical about establishing a government monopoly in reinsurance.

Mr O'Neill said it was "urgent" that Congress enact the plan. "Leaving this problem unresolved threatens our economic stability," he told the Senate Banking Committee. The industry says it can pay the $40bn in expected claims from the 11 September attack, but cannot support repeated similar claims, especially if reinsurance companies start excluding them from coverage from 1 January as is expected.

Under the Bush proposal, insurers would write and honour terrorism-risk policies as normal, but a portion of any losses would be borne by the US Treasury. That portion would shrink over the life of the three-year plan.

Starting next year, the government initially would pick up 80 per cent of any claims under $20bn from any future, officially certified terrorist attack, and 90 per cent of claims above that figure. In the second year, insurers would bear all claims up to $10bn. Losses between $10bn and $20bn would be split 50-50, and the government would cover 90 per cent of any losses over $20bn.

In the third year, insurers would be liable for all claims under $20bn, losses between $20bn and $40bn would be split equally, and the government would again bear 90 per cent of claims over $40bn.

Meanwhile, the House of Representatives was set to vote on a Republican-backed stimulus plan to inject $100bn into the economy over the next year through tax breaks and refunds. The White House has called the plan, which passed the House ways and means committee earlier this month, too generous.

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