Treasury Secretary Nominee Paulson Backed Terrorism Reinsurance Plan

June 8, 2006

The financier slated to be the country’s next Secretary of Treasury differs with his predecessor and the Bush Administration over the need for federal government involvement in providing terrorism reinsurance.

At least he did when he served in the private sector.

In a July 2005 letter, Henry M. Paulson, Jr., who was then Goldman Sachs chairman and chief executive officer, urged Congress to maintain the Terrorism Risk Insurance Act that was set to expire in five months.

“[W]e simply cannot afford to let the private sector be economically exposed,” he wrote to Rep. Richard Baker, chair, House Subcommittee of Capital Markets, Insurance and Government Sponsored Enterprises.

Paulson disagreed with then-Treasury Secretary John Snow, whose department and the White House argued that renewal of TRIA was unnecessary and that private insurers could cover the terrorism risk.

“Notwithstanding Treasury’s conclusion that TRIA has achieved is original purpose, we are not aware of any meaningful evidence showing that private terrorism risk insurance or reinsurance markets have developed ample capacity to rationally price and insure against terrorism on a scale that would adequately protect our nation’s economy,” Paulson wrote.

In his letter of last July, Paulson also downplayed suggestions by Treasury officials and others that private insurance markets could utilize catastrophe bonds and other risk transfer mechanisms. Paulson maintained that such vehicles are unlikely to offer the “broad capacity necessary to insure America’s businesses, workers and property owners against the risk of terrorism.”

Treasury is currently collecting comments as it seeks to evaluate the market solutions that may be needed when the current extension of TRIA expires at the end of 2007.

Administration and key Republican leaders have expressed a desire for a permanent private market solution that relieves the federal government of responsibility as a reinsurer.

Paulson’s nomination is expected to be approved by the Senate soon. Treasury is supposed to report to Congress by Sept. 30.

The change at the top at Treasury could give the insurance industry an ally in its attempts to continue the federal terrorism reinsurance program.

The American Insurance Association said it is pleased to have a person with financial services background heading Treasury.

“We appreciate Mr. Paulson’s position,” said Dennis Kelly, AIA spokesman. “Given his great knowledge and experience, we look forward to working with him on such an important issue as terrorism insurance.”

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