True Loss from Sept. 11 Terrorist Attacks on U.S. is Immeasurable, As Estimates of Potential Insured

By | September 24, 2001

The World Trade Center is a living symbol of man’s dedication to world peace, his belief in cooperation of men and, through cooperation, his ability to find greatness.”

—Minoru Yamasaki (1912-1987), chief architect of New York’s twin towers

It can never be overstressed that the true, irreplaceable losses perpetrated by terrorists on the cities of New York and Washington, D.C., on Sept. 11, 2001, are comprised of the thousands of human lives lost. Moreover, in the space of a few hours, New York’s World Trade Center, which has been referred to as “an engineering miracle,” was erased forever.

Such losses are truly immeasurable.

But, inevitably, the financial ramifications of such a disaster must come to the forefront, not only as they relate to those directly impacted by the tragedies, but also to the world economy.

Initial reports released after the attacks estimated that the WTC disaster would go down as the costliest man-made disaster in recorded U.S. history, likely to easily exceed the $3 billion in insured losses incurred by what, until now, was the most expensive international man-made disaster, the 1988 Piper Alpha oil platform explosion.

According to the New York-based Insurance Information Institute, the costliest man-made disaster to date in the U.S. was the 1992 Los Angeles riots, which resulted in $775 million in losses. Claims from the 1993 bombing of the WTC totaled $510 million in claims, and $125 million in losses stemmed from the Oklahoma City bombing in 1995.

Trying to put it into dollars
Widely reported estimates of insured losses stemming from the Sept. 11 destruction initially rose well into the billions of dollars, with $15 billion the most oft-cited figure in early reports.

Unfortunately, that estimate was far too low. On Sept. 17, A.M. Best doubled that figure in a commentary regarding the impact of the terrorist attacks on the insurance industry. The statement read, in part, that while it is “too early to predict the financial impact of these events… A.M. Best believes that losses are likely to exceed $30 billion, making this the costliest catastrophic event in history. The nature and location of the tragedy dictate that the majority of the losses will ultimately fall on the largest commercial carriers, their reinsurers and the London market. The segments most affected will be property, aviation, business interruption, workers’ compensation, commercial liability and life insurance.”

According to Reuters, claims may be filed for New York’s twin WTC towers, which were constructed nearly 30 years ago at a cost of $750 million. It was also indicated that a possibility exists that United Airlines and American Airlines, owners of the aircrafts that were hijacked, could file claims. U.S. insurers and leading international insurers and reinsurers will most likely share the losses. According to televised news reports, the U.S. Pentagon in Washington, D.C., which is self-insured, is estimated to have suffered losses ranging in the billions of dollars.

Furthermore, outside of the numerous city blocks surrounding the downed buildings, claims may come from companies that were not in the general vicinity of the WTC. Another possibility is the filing of stress claims. There are just myriad possibilities on all fronts with respect to this event.

Interpreting policy language
Melissa Gannon, vice president of Weiss Ratings Inc., located in Palm Beach Gardens, Fla., noted that typical policies generally do not cover war or acts of war. However, in most standard policies, there is no explicit language that excludes acts of terrorism.

As a result, it will be interesting to see how policy language will be interpreted with regard to the WTC attack. Much depends on how the U.S. government will define the attacks—as an act of war or terrorism.

“If Congress ends up declaring war on whomever they feel attacked us, insurers quite possibly could have an opening there to declare the attack on our property as an act of war, therefore excluding the coverage,” Gannon said.

On Sept. 17, Reuters reported that a number of leading U.S. and European insurers, including Chubb Corp., Swiss Re, Northwestern Mutual and Hartford Financial Services, stated that the acts of war exclusion would not apply to the attacks on the WTC.

The 99-year lease agreement on the WTC buildings, which property manager Larry Silverstein entered into with the Port Authority just a couple of months ago, reportedly excludes terrorism—”so the question is, [if] the insurance coverage on this building excludes terrorism,” Gannon said.

According to Standard & Poor’s, the most significant of the numerous technical questions insurance analysts must now consider vis-à-vis the terrorist acts are:

“Even if primary insurers in the U.S. do not usually exclude terrorism from their covers, did the reinsurance protection obtained by affected U.S. insurers exclude terrorism, as is common practice among European reinsurers? Will the crashes and subsequent building collapses be considered a single event or multiple events?…Will the events further exacerbate the already ongoing slide in equity asset values, both generally across all markets and specifically in respect of the share values of individual insurers and reinsurers? If so, how will this affect those individual insurers and reinsurers whose capitalization already appeared aggressive, and what will be the effect on those companies that were already well-advanced with new capital-raising exercises? What impact will this tragedy have on reinsurance pricing?”

It was also reported in the U.K. newspaper, the Guardian, that because the possibility of losing both towers in some kind of disaster seemed so remote that the coverage taken out by the owners of the WTC was not adequate to cover both structures.

On Sept. 14, General Motors Acceptance Corp. (GMAC) responded to the numerous requests it had received regarding GMAC’s exposure to the WTC properties.

The company press release stated in part: “The insurance required in connection with GMAC Commercial Mortgage’s financing does not exclude coverage for acts of terrorism (and includes damage caused by aircrafts). The insurance is from a consortium of 22 large and well-rated insurers.”

Evaluating the industry impact
Analysts are quick to point out, that it is too soon to adequately calculate what the total insured losses will eventually be.

“Primarily, we were comparing this in terms of property damage with a hurricane, for example…those kinds of natural disasters that have resulted in billions and billions of dollars of damage,” Gannon said. “If you look at Hurricane Andrew, which is one of the few in terms of dollar amounts that you can compare this to, although the market was affected…there weren’t mass failures, especially for large companies. The larger, more established companies, the companies that reinsure this type of coverage were all fine. They didn’t suffer severe losses in capital or anything like that. If you compare, of course not human losses, but simply property damage, this is along those lines. I’m sure the contracts for the buildings were reinsured across who knows how many number of companies.”

In fact, in a recent release, Weiss indicated that the WTC attack would likely have a comparatively modest impact on property insurers, while workers’ comp and business interruption coverages faced a greater threat.

“For property damage, eventually you know specifically what damage has been done, what it’s going to cost and how much of it was insured,” Gannon explained. “With workers’ comp that’s open-ended basically…And business interruption insurance—again that’s not as easily quantifiable as…property damage.”

Even with so many different types of businesses and workers present in the WTC, Gannon said the number of workers’ comp carriers is probably much smaller than that of the property insurers simply because fewer companies write workers’ comp.

Effect on Lloyd’s
Shortly after the attacks on New York and Washington occurred, Lloyd’s of London released a statement confirming that it has a substantial involvement in the insurance of United Airlines and American Airlines and the World Trade Center complex, but that it would not “release any aggregate loss figure until such time as it has more detailed information.”

“The situation in New York and Washington is evolving continually,” Saxon Riley, chairman of Lloyd’s, stated. “The global social and economic effects are only just starting to be felt. Any calculation of the total losses so soon after the event can only be deeply flawed. This tragedy has far reaching implications for many types of insurance, aside from appalling loss of life and the obvious property and aircraft damage. These are simply unquantifiable at present. Lloyd’s is a market, not a company—a market made up of over 100 different businesses writing a wide range of insurances, supported by multiple reinsurance programs. As a result, its analysis is made even more complex.”

However, other early news reports indicated that the attacks could have a devastating impact on Lloyd’s, which, it was noted, is still in the process of recovering from significant losses it has suffered over the past two decades.

Pulling through the catastrophe
“For the most part…unless the estimates are way off…most of the carriers involved will make it through in terms of solvency,” said Matt Mosher, group vice president, property/casualty division for A.M. Best Co. “But certainly there’s going to be a substantial hit to earnings for the year, and I would expect stock prices to drop accordingly.”

The NYSE did not reopen until Sept. 17. Mosher noted that, to some extent, just the fact of the stock markets being closed down for so many days is in itself a risk to the insurance industry. “You don’t know what type of mindset it’s built up with investors and what might happen to the equity in the market,” he said. “That could have an impact on capitalization of companies across the industry.”

In fact, by end of day trading on Sept. 17, the Dow and Nasdaq had fallen 684.81 and 115.82 points, respectively, with industries such as insurance, airlines, banks and travel particularly hard hit.

In addition, reinsurers will almost certainly take the biggest hits in terms of earnings, according to Mosher. The reinsurers are currently putting out the biggest numbers in terms of losses, but, then again, for the most part, they are the companies that have the most capital.

In these days of learning to cope with shocking reality, preliminary reports from all angles, including the insurance industry, have provided little comfort to most people.

But again, one should keep in mind what analysts keep repeating—it’s still too early to know. Unlike the innocent lives that were extinguished and the magnificent architecture that was ground to dust, this event is not likely to destroy the insurance or reinsurance industries. However, at minimum, the attacks will definitely have as deeply significant an impact on those industries as they will on the nation as a whole.

Topics Catastrophe Carriers Natural Disasters USA New York Profit Loss Workers' Compensation Excess Surplus Washington Reinsurance Aviation Property Market Lloyd's

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Insurance Journal West September 24, 2001
September 24, 2001
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