The reinsurance industry is being nationalised by the government's action to keep airlines insured, Liberal Democrat financial services spokesman Vincent Cable said.
Cable said he would scrutinise the government's role in guaranteeing aviation insurers, following the September 11 attacks in the US.
Commercial insurers withdrew most of their third-party liability cover after the hijackings, leaving airlines without enough cover to fly. The government stepped in to keep planes in the air by providing financial security in the form of a reinsurance deal.
Cable supported the move in principle, but raised concerns about using public money to support the private sector airlines.
He said: “We are effectively nationalising the reinsurance business because the private market can't handle the risks on the scale required.
“There's a real danger that the public sector will be underwriting private sector risk. The taxpayer will be paying for things that passengers and consumers should be paying for.”
The government's deal reinsures a new company, Troika, which provides the cover airlines need. Premiums were waived for the first month, after which the deal will be reviewed.
It is not the first time the government has entered the reinsurance business.
It created a mutual, Pool Re, to reinsure terrorism risks after the IRA bombing of the City of London caused commercial insurers to withdraw cover in the early 1990s. If Pool Re's premiums and reserves are exhausted, the government will meet remaining claims.
Cable said: “It is right in principle to follow the Pool Re model, but the government has to be extremely careful in taking on open-ended liabilities. We have to be careful the government is giving open-ended support for the airlines.”
He intended to question Treasury ministers on the subject when Parliament is recalled today (October 4).