9/11 One Year Later: Lingering Issues

In the aftermath of the terrorist attacks in the U.S. on September 11, 2001, the insurance world was rocked to its core. Companies faced personal loss, including brokers Marsh and Aon who endured the loss of hundreds of employees working in the collapsed World Trade Center (WTC) towers.

Reinsurers worldwide braced for the worst loss in the industry’s history and an already troubled insurance market was tossed into a maelstrom. The international aviation industry was nearly grounded when insurers promptly cancelled third-party war risk coverage, and governments stepped in to offer “temporary” coverage. Companies in the energy, real estate, travel and tourism, even pro sports industries faced yearend insurance renewals with little idea of what, if any, coverage would be available for terrorism risks.

Reinsurers, already hard hit by losses across lines and facing an estimated US$30-$50 billion price tag from September 11, were unwilling to price terrorism risks with no idea of what future losses could do to the industry. Insurers, in turn, began excluding the coverage from policies in both commercial and personal lines.

In Canada and the U.S., commercial insurance buyers and insurers banded together to urge governments to step into the void left by the withdrawal of reinsurers. Although there was seeming acceptance on the part of these governments that some kind of support was needed, a quick solution was not to be found. And airlines, having been granted extension after extension of government coverage, are now looking at establishing their own mechanism to provide war risk coverage. A year after September 11, terrorism coverage remains an unresolved issue, and despite recent developments, no end is in sight to the turmoil.

SEEKING COMPROMISE

Among the recent developments, is the formation of a committee of U.S. senators and congressional members charged with coming up with a “compromise” terrorism bill. A congressional plan on the table since late last year would have the U.S. government handing out loans to insurers in the event of a future attack. A more recent Senate plan, Bill S.2006, would see the government act as an excess reinsurer to the industry.

President George Bush has publicly pushed the two sides to come to an agreement, although two key issues have hampered the process – whether or not tort access is limited for victims’ families and whether or not insurers will be required to pay the government back should it have to cover losses.

“Those are two very large sticking points,” admits Mike Phillipus, vice president of communications and external affairs for the Risk and Insurance Management Society (RIMS), the lobby body for corporate risk managers in the U.S. and Canada. Phillipus says RIMS was in Washington when the appointments to the “compromise bill” committee were made and despite the hurdles, there is a positive energy around the process. “We understand that there are a certain number of issues that are being worked out by staffers during the [summer] recess,” he adds.

While Phillipus is reluctant to say that RIMS endorses the Senate plan, he does note “generally we prefer a government backstop rather than a loan system”. The society also advocates some level of tort access. “One of the things of concern is government [and hence taxpayers] ending up footing the bill for lawsuits for third parties. Generally, this mechanism should not be used to compensate for the actions of terrorists.”

There has been at least one voice of the dissention in the U.S. In late August, the Consumer Federation of America came out with its own study, refuting the need for government intervention. While acknowledging that commercial insurance rates have increased since September 11, the report suggests these rates will “stabilize by mid-2003”. It adds that terrorism coverage is “generally available except for commercial properties seeking more than US$500 million in limits”.

“We vehemently disagree,” says Phillipus. While new capital has come into the insurance marketplace, very little of it has been directed at terrorism coverage, he notes. “We think the need is still there. So many companies are facing large price increases or “going bare” [i.e. going with no coverage or far less than they once had].”

But, Phillipus does say that companies’ unwillingness to publicly discuss their insurance woes, what they are paying and whether or not their coverage levels have dropped has been an issue in the lobbying process. “We’ve had a hard time getting some of the information to Congress that they need.”

RIMS is currently surveying members to determine where the situation now stands, “and possibly to assist Congress in moving forward…to show what we’ve heard anecdotally from members.” In the meantime, the U.S. government may come to its own solution, although Phillipus is not confident this will happen before the anniversary of September 11. Some staffers were suggesting that was possible, but it might be a little ambitious.” The market is more likely looking at a December 31 goal for having a plan in place.

SLOW PROGRESS

The Canadian scenario has mirrored the U.S. example in terms of the pace of action, or rather the pace of inaction. Originally, the Insurance Bureau of Canada (IBC) was lobbying hard for a government solution here, in talks with the Ministry of Finance. “We put forward proposals over the fall [of 2001] and kept modifying and modifying them,” says the bureau’s president Stan Griffin.

The IBC was accompanied by other industry groups, including RIMS’ Canadian contingent. “On behalf of Canadian risk managers, we needed to put our support behind the IBC’s efforts to have the government create some kind of terrorism fund,” says Wayne Hickey, chair of the Canadian Risk Management Council (CRMC). The CRMC was hoping the government would come up with a solution to cover “target” properties, business interruption exposures, certain forms of lenders’ interest exposure and explosion losses, including “fire-following” explosions.

But, the Canadian lobbyists hit a wall. “The federal government continues to say ‘we are waiting to see what happens in the U.S.’ We are getting closer in the U.S., so this may be what changes things,” says Griffin. However, he adds, “we don’t see much of a change in status going forward.”

And, while the Canadian government is awaiting a U.S. model, Griffin says there is no indication that the system chosen in the U.S. would be used in Canada. Discussions just never reached this stage, he explains.

CHANGING POSITION

One group the IBC and RIMS may not be getting as much support from are real estate developers in Canada, as represented by the Canadian Institute of Public and Private Real Estate Companies (CIPREC). While it was the first trade association to approach Finance in early October of 2001, initially seeking an “order in council” to create a reinsurance backstop much like that made available to the aviation industry, market changes have altered CIPREC’s position.

CIPREC executive director Michael Brooks notes that after seeing companies go through November 1 renewals, and then yearend renewals, and not get terrorism insurance, the group saw few repercussions. “They did not get terrorism coverage, and the sky didn’t fall.” Unlike the U.S., lenders in Canada were willing to proceed with financing even without coverage in place. “In Canada we haven’t had any failed financing and no failed construction projects as a result of the lack of coverage.”

Also, since early 2002, the insurance market has settled somewhat he says, with limits rising and premiums dropping back. “We started to moderate our position after the U.S. government did nothing [by yearend 2001] and the insurance market stepped up,” says Brooks. “Our new position was to prefer private market solutions. We were pleased that the law of supply and demand showed that it was working.”

Builders here have also not faced the “red-lining” that has taken place, where some insurers have drawn the line in the U.S. on how much coverage they will write in a given area, such as “target cities” like New York.

But, Canadian companies with cross-border property risks may face stiff conditions in the U.S. market where lenders are being more vigilant. Although, Brooks notes, there are few such companies, and even fewer with “trophy” properties, in other words large commercial structures in U.S. cities.

Griffin acknowledges that “there doesn’t seem to be too much of a negative reaction from the lending institutions [in Canada]”. However, he does say, “from what I’m hearing, the reinsurance market is still very limited for terrorism coverage and prices continue to be much higher than they were a year ago”. He also notes that the while reinsurance limits may be available to a certain level (he is hearing the figure $100 million), there is a question of whether or not this level is sufficient.

Risk managers from large properties or high-risk industries such as energy, are feeling the squeeze of limited capacity in this market. “Terrorism coverage could not be purchased by major companies for buildings and structures that may be considered “targets,” Hickey observes.

EXCLUSION LIMITATIONS

Griffin confirms that a majority of insurers have instituted terrorism exclusions on commercial lines, and to a lesser degree on personal lines property policies. However, he stresses, these exclusions are limited, particularly when it comes to the requirement for insurers to provide coverage for “fire following” such a disaster. Reinsurers, on the other hand, do not face the same requirement to provide coverage, thereby creating a market gap.

A committee formed by the Canadian Council of Insurance Regulators and chaired by Alberta insurance superintendent Arthur Hagan is currently looking into this and other terrorism insurance issues. “The CCIR is concerned about the impact of the terrorist attacks on the Canadian insurance marketplace. The main objective of the committee is to identify activities which may be adversely affecting insurance consumers such as whether adequate notice is being given to consumers about the elimination and reduction of coverage,” says Hagan.

“Another objective is to research how property and casualty insurers are dealing with the provisions of the statutory fire policy,” he adds. The committee will report back to the CCIR in October with a list of issues to be researched.

Another lingering issue is when, if ever, the market will return to pre-September 11 conditions. Phillipus says RIMS initially proposed something like the U.K.’s Pool Re mechanism for long-term government guarantee of large-scale terrorism losses, but this did not get government support. “One of the challenges is that both Congress and the government say they don’t want something long-term.” However, he wonders, “is there going to be an actuarial basis [for pricing terrorism risks] going forward?” In lieu of a series of terrorism incidents such as September 11, how will insurers ever be able to understand or price terrorism risks?

UP IN THE AIR

One area of coverage insurers show no sign of returning to are third-party war risk liability in the aviation business. Air carriers are facing increases across all lines, but there is insufficient affordable third-party war risk coverage available in the private market.

Through the International Civil Aviation Organization (ICAO), based in Montreal, carriers sought government intervention when insurers cancelled the coverage after September 11. Governments did step in with “temporary” coverage, but the deadline for this coverage to end has been extended time and again and now runs into the fall in most countries. These extensions were based on the assumption that the civil aviation industry was pursuing its own solution.

Two regional plans, “Equitime” in the U.S. and “Eurotime” in Europe, have been proposed to create self-insurance schemes for carriers in only those regions. But, the ICAO has also petitioned member states, which total 188, to sign on to its plan. That scheme involves a pool that would offer coverage capped at US$1.5 billion to each airline for claims in excess of US$50 million. Claims would be paid from premiums and investments, but member states would act as guarantors of last resort.

The regional plans do not necessarily compete with the ICAO solution, says ICAO spokesperson Denis Chagnon. “They are to some extent complementary. One does not negate the other.” Regional plans could be rolled into an overarching international plan, he says. And the ICAO plan also has a five-year deadline, although should the insurance market return to offering the coverage, the plan could end even earlier.

To push the plan through, member states representing 51% of dues would need to approve. The deadline for states to respond to the plan has been extended into mid-October to allow states who require it time to seek legislative approval. “It [the ICAO plan] is very much being considered by a number of states,” confirms Chagnon. The European Commission and the U.S. represent the largest voting blocks. Chagnon notes that particularly if European countries begin to come out in favor of the plan, other countries will be more inclined to follow suit. The U.S. member has unofficially voiced approval for the plan, but airlines will have to wait until fall to find out their fates.