The Risk of Terror: Cost on Life

Unlike the San Francisco earthquake of 1906, Hurricane Andrew in 1992 or other major storms like Lothar, Martin or Daria, this terrorist disaster has had significant loss of life. At the time of this writing the estimate is approximately 5,300 lives lost in New York City plus 250 in Washington and Pennsylvania. Dollar estimates for the entire crisis are currently ranging from US$20 billion to US$50 billion. Before September 11, the largest disaster insurance payout had been Hurricane Andrew at just under US$20 billion. Based on a total estimated insured event this time of US$30 billion, the following chart, courtesy of Tillinghast- Towers Perrin, attempts to break down the amounts that might be paid by each main insurance line.

The American life insurance industry pays out on average over 10,000 life insurance claims every day. It has over US$3 trillion of assets and liquid reserves. Beneficiaries can be assured that the life insurance industry has the ability to pay claims in full. Even though there have been declarations of war on terrorism, the old “war exclusion” clauses fell into general disuse after the Vietnam war, and most would say that they were never intended for use in events which occurred on September 11. Terrorism exclusions may possibly be found in foreign jurisdictions where terrorist acts are more prevalent. However, they don’t typically apply when insureds reside in Canada or the U.S.

Coverage lines

While most people have naturally thought of the individual life insurance cost, one should also be aware that group life coverage – where insureds are often covered for multiples of salary – will be significant in the overall loss. Accidental death coverage, which usually pays double the face amount on life insurance or may be elected as a separate coverage on its own, will not be an insignificant number. Special corporate owned life insurance plans (COLI) likely were enforce with large face amounts. There will be medical reimbursement payments made by life and health insurers, but unfortunately this number will be modest due to there being few survivors. An unknown future cost may be borne by disability carriers for conditions like post traumatic stress syndrome. This condition became evident after the Oklahoma City tragedy when surviving victims, or some witnesses weren’t able to return immediately afterwards to their normal office work routine.

Proof of loss

It is normally necessary to obtain a death certificate in order to obtain life insurance proceeds. However, in this extenuating loss where so many persons are missing and now presumed dead many companies are innovating with a specially signed affidavit which has been endorsed by the ACLI. Canadian insurers may elect to use this form in lieu of normal papers. Airline passenger lists may be sufficient in some cases. The insurers reserve the right to corroborate statements later on and false declarations would be deemed fraudulent and would have the penalties of perjury. As well, forensic DNA testing is taking place which will absolutely determine identities where tissue samples can be obtained.

Reinsurers’ role

Although the public does not normally see the behind-the-scenes role of reinsurers, the large companies have had an ample amount of newspaper ink about their likely exposures. In aggregate, reinsurers may be liable for upwards of 30% of all paid life and non-life claims. Life may account for only 10% to 15% of the total reinsurance losses. Reinsurers also have retrocession covers which will come into play on only the largest claims. Catastrophe reinsurance, which usually becomes effective when three or more lives perish in the same event, will undoubtedly be claimed. Amounts that exceed the catastrophic limits will have to be paid by the primary insurers.

It is difficult to estimate any reinsurer’s total life loss. One might attempt an estimate by taking one’s marketshare in that area of the country multiplied by the assumed number of policies in force, multiplied by the percentage reinsured. Industry surveys now suggest that about 40% of all U.S. individual life policies are reinsured by face amount. For group life, the reinsured number is a low 1%. Of course these are just broad averages and will be altered by specific characteristics of each reinsurer’s book such as actual size distribution among other factors.

The global reinsurance industry for life and non-life has over $280 billion of capital and surplus. Standard and Poor’s does not expect ratings downgrades for the best capitalized reinsurers who will be able to take these losses in stride.

Where to?

It will take many years before the final payments – primary or reinsurance, life or non-life – are made. From the life perspective, the accidental death component of premium rates may need revisiting on account of September 11. However, overall insured mortality continues to improve slightly each year and the large payouts will assume less financial prominence over time. The general public may even be inclined to purchase more life insurance at least in the short run as they better realize life’s uncertainties. However, questions do arise that will require further review. Here are just a few examples:

Will future life policies have to be more restrictive on their geographical scope of coverage? It would now seem certain that travel to particular countries or regions will cause modification or declination of coverage.

Will any new consideration have to take place about concentration of risk in certain domestic markets?

Will risk and retention management have to be revised for life insurance? It is possible that there could be reduced capacity or higher reinsurance charges for the largest life cases.

What will the impact be on variable life and annuity portfolios which have seen fund values drop in light of weak equity markets? There may be larger costs for guaranteed minimum death benefits.

Will reinsurance strength and solvency become even more important than they are currently? The shock of unexpected claims may accelerate the flight to the most secure reinsurers.