Government Sees Insurers as Tool to Encourage More Security

U.S. government seeks to have insurance industry leverage its power to encourage additional safety and security at major businesses and plants

WASHINGTON -- Homeland Security officials in the Bush administration are considering ways to use the insurance industry as a free-market-friendly vehicle to drive chemical facilities, food companies, utilities, and other businesses to take greater precautions against terrorist attacks without heavy-handed new regulations.

The concept of using insurance to spur companies to spend on counterterrorism measures may solve a vexing homeland security problem: Despite improvements the government has made to upgrade security at public facilities since the 2001 Al Qaeda attacks, 85 percent of American infrastructure is privately owned and underprotected.

Any attack on chemical, ground transportation, banking, food, energy, or utility sectors could cause massive destruction and cripple the economy. But companies have lobbied hard to defeat legislation to force them to upgrade their security practices, finding allies among free-market Republicans in Congress.

Proponents hope the insurance proposal will be a sweeping solution to the impasse. The basic idea would be to have the government or each industry develop a minimum set of security "best practices." Then, insurers would audit companies for compliance with those standards, with the power to reduce premiums for those who comply.

The idea is being promoted by homeland security specialists close to the Bush administration, although many still disagree on how the details should work. In addition, the insurance industry is skeptical about any version that would require it to provide terrorism insurance -- a still fledgling and poorly understood market -- or to offer discounts based on someone else's standards.

Valerie Smith, a spokeswoman for the Department of Homeland Security, confirmed that Alfonso Martinez-Fonts, head of the department's Private Sector Office, has been working on the issue, although the department declined to make him available for an in-depth interview.

"The insurance issue is being discussed at the department," Smith said. "It would be premature to talk about it until more conversations have been had with the industry and more decisions have been made. Everyone agrees that this is an important issue and good ideas to think about."

In a further sign that the administration may be quietly paving the way for the model, the White House's 2006 budget request for Homeland Security, unveiled last week, doubled funding for a Freedom of Information Act-exempt program that examines trade secrets from private businesses to assess their vulnerabilities to terrorism.

"The theory is perfect," Paul Rosenzweig, a homeland security analyst with the conservative Heritage Foundation, said of the insurance proposal. "The reality may be problematic. It's absolutely worth exploring, and indeed it looks like they are putting a lot more money into [exploring] it."

Many security specialists warned that relying on each industry to develop its own voluntary security standards has been a failure for two reasons: Executives fear the market will punish them for diverting profits into security if their competitors do not do likewise. And companies suspect that regulatory mandates still may come and they do not want to waste money buying the wrong things.

"In the chemical industry, for example, voluntary standards have not worked, period," said P. J. Crowley, a former insurance executive and former National Security Council official. "Part of the answer is finding incentives for them to make the business decision to adapt their materials or processes to reduce or eliminate the risk."

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