Industry Faces Reality of War in Iraq

March 20, 2003

As war began last night with U.S. air attacks on selected targets in Baghdad, that apparently just missed Saddam Hussein, the insurance industry nervously prepared for the global fallout.

Commercial insurers warned their clients – mainly oil tanker and cargo shippers and some airlines – that coverage for losses in the Middle East would be cancelled within 48 hours of the commencement of hostilities. While the “real” war has yet to begin, most indications are that it’s only hours away, which would effectively cancel the coverage by Saturday.

New coverage can be negotiated, and, depending on what happens in the first few days of the war, probably will be. However, to secure it for the area during the hostilities much higher rates will be demanded for cargo coverage in general, and for tankers in particular.

For the airlines, most of whom are still suffering from the downturn in travel, following the Sept. 11 attacks and the general global economic slowdown, a new war and higher insurance costs could be a fatal blow. The U.S. has already indicated that present programs providing emergency coverage that were put in place after Sept. 11 will continue. The British government has said that it’s prepared to offer emergency coverage, if necessary.

Europe’s airline insurers have indicated, however, that, although they may raise some rates, they would not generally cancel coverage. A spokesman for the Aviation Insurance Offices Association, the London-based organization that represents Airline insurers, told Reuters News Agency that he thought “insurers will be trying hard not to cancel coverage completely and therefore there should not be a case for government intervention.”

In the same article Ken Coombes, Sr. VP for aerospace at Marsh Inc., observed that during the first Gulf War insurers had continued to provide coverage. “We don’t see the insurance market withdrawing cover,” Coombes stated. He also pointed out that as the risks were higher the returns would be proportionately higher as well.

The ultimate question on the minds of most insurers is how long the war will last. While the Bush administration sees a short, sharp war, ending in weeks, many other observers have noted that war is perhaps the most unpredictable of human activities, and a short war is only one possibility among many. After all, World War I was supposed to be over by Christmas of 1914.

If the “short war” scenario proves true, the insurance industry would be greatly relieved. It would end the uncertainty that the prolonged negotiations over weapons inspections has produced, and replace it with a stable government in Iraq, backed by U.S. military power. This would hopefully stabilize not only the level of insurance risks in the region, but also the world economy in general and global stock markets in particular.

Whether the war turns out to be short or long, it will have an affect on the insurance industry. According to London’s Financial Times around $250 billion has been “wiped off the global industry’s balance sheet in the past three years.” Insurers, including some of the world’s biggest, (See following story on Allianz) have been forced to write down the value of billions of dollars in their investments, while interest rates have shrunk and claims reserve demands have increased. The result has been reduced profits for most insurers and losses for many of them. A short war could lead to an upsurge in equity values that would restore tattered balance sheets and increase excess capital and therefore capacity. A long war would have the opposite affect. For the moment, however, nothing is certain.

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