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Who will pay to insure Freedom Tower? (File photo)

When market forces aren’t enough

ASK THIS | August 16, 2006

James Forest, who teaches terrorism studies at West Point, wonders what happens if market forces alone don’t lead private companies to sufficiently protect and insure critical infrastructure. Third in a series about homeland security.

By James JF Forest

Q. Are market forces sufficient to compel companies to protect their networks and facilities, or should the government intervene more aggressively and mandate security measures? How much of the cost for homeland security should the federal government, the states, or the private sector bear? Should the private sector foot the entire insurance bill for signature buildings such as New York City’s Freedom Tower, or should the government bolster insurance protections for terrorist targets?

It has been estimated that as much as 90% of the nation’s critical infrastructure is owned and operated by the private sector. From the private utilities industry (including nuclear power plants) to the food supply and distribution system, Americans rely on many companies to protect and maintain the critical infrastructure that underpins our daily lives and our economy. These companies, like any other, must focus on profit considerations in order to stay in business, and those considerations impact their decisions about making expensive investments in improving the security of their buildings and operations.

One of the costs of doing business involves purchasing insurance policies in case something bad happens – whether that be floods, tornadoes, criminal activity or a terrorist attack. Prior to the attacks of 9/11, insurance coverage for losses from terrorism was included as a normal feature of insurance contracts. However, 9/11 changed insurers’ perception of their potential risk exposure. Specifically, there is little agreement about how much to charge for this coverage going forward because it is impossible to predict future losses. As a result, it has been reported that industry leaders may exclude insurance for terrorism from future insurance contracts unless the federal government provides some form of assistance to the industry.

Thus, Congress has been considering whether and how to provide financial backing to the insurance industry so that insurance is available for losses due to terrorist acts. Clearly, a financially strong insurance industry is essential to the smooth functioning of the economy. Insurance coverage for catastrophic events such as a major terrorist act is necessary for investors and other financial decision-makers to be willing to provide capital to promote continued economic growth and stability. However, it is important (particularly from the perspective of taxpayers) to strike the right balance between safeguarding the private sector’s access to necessary insurance protection, while ensuring that the insurance industry is assuming its fair share of risks.

Posted by OC Patriot -
09/03/2006, 10:37 PM

Thus far, the current Administration has siphoned off the monies required to repair our infrastructure by spending on the Iraq war, agreeing to vast amounts of "defense" spending, creating an environment in which oil prices can rise as high as the oil companies would like, creating tax breaks for a very small segment of the population that must be made up by the rest if any money is to be raised. Sure, your piece raises a good point but I can see no way that the pigs who have been so accustomed to using the government trough will ever give up such a lucrative conduit for this kind of money. The amount of pork doled out in the name of Homeland Security is stupendous. Perhaps when the oceans rise six to twelve inches or a military draft is instituted or oil hits $200 a barrel will any action be taken and, by then, it may be too late.

Part one: Still too many unanswered questions about homeland security
Have government agencies charged with protecting the homeland gradually reverted to business as usual -- where policies are influenced by political expediency rather than a genuine response to threats?

Part two: Is the best defense a good offense? Or a good defense?
What more effectively reduces national risk: $3.1 billion for a squadron of F-22 fighters, or $3.1 billion for port security?

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