The Insurance Industry after 9/11: Planning for the Future
Caruso, Frank, Real Estate Issues
Throughout the insurance industry, it is not business as usual. The attacks on the World Trade Center on September 11, 2001, sent shock waves through society and the business community that will significantly impact the availability and cost of insurance for years to come. An in-depth analysis of the consequences of these events and the resulting market will hopefully enable consumers to more accurately anticipate, plan, and budget for insurance costs.
PRE-SEPTEMBER 11, 2001
Prior to September 11, the insurance industry was heading into a "hard" (as opposed to "soft") market cycle. During the mid-1990s, insurance providers were aggressively writing and pricing business so that premium income could be invested in the financial markets. Underwriting profits were not as important as bottom-line results. In 2000, as investment income disappeared and the flow of loss activity continued, underwriters realized that if they were to survive they needed to adjust their pricing upward, restrict coverage terms, and cancel those accounts that were unprofitable. Many insurers were counting on 2001 as the beginning of a return to normalcy.
In the Tennessee/Kentucky region, we were beginning to feel these exact changes. Rates were increasing, primarily based on the class of business, the loss history, and the line of coverage. A 15 percent to 20 percent increase was not out of the norm. We saw several accounts with poor claims experience and severe exposure experience premium increases of 50 percent or more. Non-renewal notices began showing up more frequently than anticipated. Workers Compensation Insurance led the way for most carriers to take the appropriate underwriting action in order to maximize rates. Pre-9 /11/01, the hard market had arrived, but it was a gradual build up of price increases and changing terms and conditions. Many underwriters still listened to the agents' case and made some attempts to adjust their own positions.
THE TRAGEDY OF SEPTEMBER 11
September 11, 2001, was a loss no one could conceive. As of March 2002, cost estimates ranged from $30 billion to $72 billion. As noted by Morgan Stanley, it will be the largest workers compensation loss in history (by multiples); the most expensive aviation disaster in history (by multiples); one of the largest property losses in history; the most expensive business interruption loss in history (by multiples); the largest life insurance catastrophe loss in history (by multiples); and potentially one of the largest liability claims in history. In insurance circles, this is referred to as a "clash" event-where multiple losses, in different lines of coverage, arise from the same underlying cause. Clash events are outside of an insurance carrier's normal actuarial assessment of its aggregate loss exposures, so the catastrophic impact is exponential.
According to Business Insurance magazine, the financial shock will leave most insurers and reinsurers damaged, but solvent. The extent of financial damage will depend on the ultimate industry-wide loss. As this number increases, greater is the risk of insolvencies. According to Standard & Poors, however, the industry likely has the capability to manage itself out of the problem. Should the costs rise above $50 billion, the outlook would indeed change with regard to the solvency of insurers.
One of the problems that will grow as losses escalate is unrecoverable reinsurance, though it should not prove crippling for most insurers. At the very least, insurers may face delays on reinsurance recoveries as disputes arise over coverage terms. Now brewing is the debate over whether each plane that crashed into the World Trade Center constitutes a separate loss occurrence. Combined, the towers had insurance limits of $3.5 billion, however each 9/11 occurrence on the actual building complex coupled with property loss is being estimated at over $10 billion. Therefore, resolution of issues such as this will be critical to the industry's financial wellbeing. …