When is business, “Business”?

The tragic and unexpected events which unfolded on September 11 of this year when terrorists attacked the World Trade Center, New York City, and the Pentagon in Washington D.C. by using four hijacked jetliners as “flying bombs” has left the world dumbfounded.

At first, the horror as news of the travesty swept across global news wire services, then the shock as the true cost of the events in lost lives and property began to take hold. Not least, the insurance industry was delivered a terrible blow as many companies had offices located in the World Trade Center, which has served as the hub of New York City’s financial district for generations. Our hearts go out to the survivors, friends and relatives of those so many lost as a result of the senseless and inhuman acts carried out that day.

With several weeks having past since the wanton destruction on September 11, the authorities and the insurance industry have begun the necessary but sad task of cleaning up and settling claims. Early estimates relating to the insured loss resulting from the terrorist attacks were pegged at about US$10 billion, however, this figure soon escalated to between US$20-30 billion. It now seems that even this latest reported loss estimate may be dwarfed by the final tally as insurers and reinsurers are provided with more accurate data relating to their exposures. At first, industry commentators were comparing monetary costs of the World Trade Center and Pentagon attacks with the Piper Alpha oil platform explosion of 1988 in terms of being the largest, colossal man-made disaster. It now appears that insured losses arising from the terrorist attacks will far surpass many of the largest natural disasters in history, including Hurricane Andrew, which has raised concern over the financial stability of insurers and reinsurers alike in settling claims.

It should be noted that, despite financial down-grades of certain insurers by rating agencies, roughly 40 major insurance players have thus far made public statements indicating that they expect to remain financially secure and capable of dealing with their exposures. At the time of going to print, the companies in question accounted for about US$15 billion of the expected claims from the events. It should also be observed that every company so far to have reported loss estimates have made it clear that they will not be invoking standard policy exclusions relating to “war” or “terrorism” acts.

While the honor and unity of the insurance industry in how it has reacted to dealing with the terrorist attack claims is to be commended, the potential future risk facing the industry as a result of terrorist related losses is daunting. While many insurers writing business in the U.S. did not rely on terrorism exclusions in writing business, mainly due to the perceived low risk of such events occurring on American soil, a number of the global reinsurers are believed to having written in standard terrorist exclusions in their covers. The fact that none of the “big four” have been willing to act on these exclusions has led others to follow suit, a reinsurance source says.

This ultimately drives to the point of my editorial, which is “when is business, business?” How will the industry price and evaluate future risk exposures if the “rules of the game” are changed during the course of an event? If any reinsurers or insurers who had priced the risk based on limited exposure of exclusions end up facing insolvency or financial difficulty as a result of paying out a significantly larger percentage of their expected loss, then who will be held responsible? What if another terrorist attack is committed, creating sizeable losses, will insurers be able to financially respond after having set a “policy” of paying regardless? There is also the question of re-pricing and capacity, will insurers/reinsurers react with a “knee jerk” to the September 11 events, and possibly spark the next market withdrawal crises as happened after Hurricane Andrew?

There are almost countless considerations and complexities that will have to come into play in terms of how the insurance industry deals with its exposure to terrorism acts. It is safe to assume that the tragedy of September 11 and the significant economic impact of those events has opened the door to future terrorist attacks in North America. The distasteful, but inevitable likelihood of this is something the industry can ill afford to ignore, as well as the realistic need to stick to the terms of the business.

6www.canadianunderwriter.ca CANADIAN UNDERWRITER / OCTOBER 2001