The financial and human losses from the events of Sept. 11 continue to haunt insurance companies across the country and for that matter, the world.
Following the tragedies that impacted New York City, Washington, D.C., and Pennsylvania last month, insurers have been assessing the situation and beginning to pay claims that will undoubtedly continue flowing into their offices, impacting third-quarter results. As of Oct. 5, 13,503 claims have been filed relating to the World Trade Center disaster, according to the New York Department of Insurance. Of these claims, 7,899 are commercial, 5,604 are personal, and the total claims value is $4.039 billion.
The act-of-war question
A majority of larger U.S. and European insurance carriers have indicated that the attacks on the World Trade Center do not qualify as an act of war, and thus will not invoke the act-of-war exclusions present in most property and liability policies. If other insurers take the same position, the implication would be that insurance companies globally would have to turn over the billions in claims expected by industry experts in relation to the destruction .
A number of companies, including Ace Ltd. (estimated losses $550 million), Hartford Financial Services Group Inc. ($450 million), and The St. Paul Companies ($700 million), joined a list of insurers who have said they would not invoke the provision.
Chubb Corp. released a statement following the attacks noting that the act-of-war exclusion did not apply to Sept. 11 events, and that it expects to pay out between $500 million and $600 million for the attack.
Chubb CEO and Chairman Dean O’Hare is calling on Congress to form an insurance pool for terrorism coverage similar to the one that was formed in the United Kingdom following terrorist acts related to the conflict in Northern Ireland.
Human toll exceeds financial losses
While the financial toll continues to mount for a number of insurers and reinsurers, the toll of losing loved ones and colleagues has had a more profound impact on companies, especially at Aon Corp. and Marsh. Both brokers had a significant presence in the World Trade Center, and together the two have reportedly listed more than 500 employees as missing following the attacks.
Aon spokesman Stephen Ban noted that the last few weeks have been especially difficult for company employees who have lost some 200 co-workers in the WTC.
“It was a time of a great deal of chaos immediately after,” Ban said. “It was critical for us to find out who was okay and be able to reach out to those people who were related to those who weren’t. Shortly after, we established crisis support centers all around the New York metropolitan area—places where people could go and talk to a counselor or congregate with other employees. Importantly, we had experts on hand who could answer very specific questions on insurance and benefits.”
However, even in the midst of the tragedy, Ban said some good has arisen. “In the face of such evil, you can see so much good come out of people who are really trying to help their fellow human beings. It has been amazing. The outreach we’ve had from partners, carriers, clients and competitors has been overwhelming, literally from all over the world.”
Facing a possible recession
In a letter to shareholders posted on his website Sept. 26, billionaire Warren Buffet warned of a recession, “probably a relatively deep and extended one, but they are part of business life and we are prepared.”
Buffett estimated holding company Berkshire Hathaway’s losses from the terrorist attacks at $2.2 billion. “We’ve labeled this a ‘guess’ because that’s all it is. It will be many years before we can tell the world within a narrow range what the true figure was,” Buffett wrote.
A high percentage of the loss occurred in Berkshire’s U.S. insurance companies, with the balance in German and U.K. entities, according to Buffett. Because the company has regularly paid very large amounts of U.S. income taxes, it will bear 65 percent of the cost applicable to the U.S. operations, while the government will bear 35 percent.
“Many insurers will not have their loss mitigated in this manner and some may not survive,” Buffett wrote. “Though much of our loss will be paid very soon, significant payments in the liability area will take a considerable time to settle.
“Even with tax recoveries, our loss is huge. Nevertheless, it’s one Berkshire can easily bear. We have long been in the super-cat business, and we have been prepared, both financially and psychologically, to handle them when they occur. This won’t be our last hit, though we fervently hope disasters in the future arise from natural causes, rather than be man-made.”
Where do we go now?
When Bob Schiff, a partner in San Francisco-based Haight Brown & Bonesteel’s Risk Management & Insurance Law Group, looks at the impacts of the disasters, he sees a bumpy road ahead for some in the insurance community.
“Those that have very large exposures are going to have to look at cash-flow issues,” Schiff said. “The smaller businesses that may be financially on the edge will probably not be that greatly impacted by this because they generally would not have insured the areas around the WTC.”
Schiff also sees major insurance problems for the airlines as a result of the four hijackings. “The airlines have pretty huge problems,” he said. “The surplus in the aviation market is going to be sucked out in a hurry.”
When insurance policies come up for renewal, Schiff expects most premiums to rise, especially in the property arena.
“A lot of policies renew Jan. 1, and right now is when people are starting to put together applications, so folks who have to insure large commercial properties in Los Angeles, San Francisco or Chicago, if they’re unable to get enough capacity, they’ll come complaining to the government. If you had to pay it [estimated losses of $30 billion and up] all today, there probably wouldn’t be enough liquidity among the players who have to pay it. They’ve got some time and they have investments. It’s kind of a double whammy because the stock market went south too. That’s where the liquidity comes from.”
One possible solution is a terrorism insurance pool to provide a source of coverage.
“It may depend on the marketplace, but for admitted coverage it is going to be very hard,” Schiff said. “I can’t imagine anyone running for the office of insurance commissioner readily agreeing to a form that had a terrorism exclusion. If the market’s not adequate, there will be some kind of response to take those risks out of the marketplace and restore it to normal.
“The pool won’t come around until the industry is unable to deal with it [losses] in a traditional way. It is very hard to organize. Based on what has happened with earthquake coverage in California, it is very difficult to organize a sufficiently high limit. If there’s a major disaster, you need billions of dollars.”
Learning from disaster
For insurers of significant properties, Schiff sees some changes when it comes to insuring massive items such as the World Trade Center.
“I suppose at least for a while that rating will not be based on the kind of assumptions that if you have two buildings close together, the worst is that one of them goes without the other.” If the buildings are replaced, Schiff expects outrageous costs to rebuild and insure.
“When people sell you replacement cost coverage, they look at the last disaster to see what rates they should be charging, not the last negotiated arms-length contract to get the rates. We learned that after Northridge. No matter what else happens, rates are going to go up. Companies will have to think about higher limits than in the past.
“We’ve never had a situation where the maximum probable loss exceeds the amount there is to pay it. Who would have thought of a disaster like that in Lower Manhattan? They’re talking about a $4-billion coverage on the two Trade Center towers that was available—that’s a huge amount of insurance. I don’t think anyone would have predicted those two buildings going at once. If you’re an underwriter and doing a maximum probable loss, you would have a fire in one of those towers, and so you’d have one tower as a total loss.”
Unfortunately, that would have been a best-case scenario that did not play out.