S&P: Insurance Industry Not Crippled by WTC Attack

September 17, 2001

Standard & Poor’s announced that the direct financial losses relating to the disasters will in all likelihood exceed the largest insured losses ever yet seen.

“Any attempt to quantify the financial impact of the recent terrorist actions in the U.S. must be purely speculative until more information becomes available, which may take weeks,” said Steve Dreyer, managing director for U.S. Insurance Industry Ratings at S&P. “But the insurance industry is strongly capitalized and can withstand an enormous financial hit without threat to the stability of the system overall.”

“While we cannot yet endorse a specific estimate, companies so far have acknowledged about $4 billion in losses, a figure which will likely go much higher. Once insurable losses exceed $10 billion or $15 billion, we would expect to see a significant impact on balance sheets of individual insurers. However, the totals would have to exceed $50 billion before we would begin to worry about the insurance system,” he said.

In comparison, Hurricane Andrew cost the industry approximately $20 billion in today’s dollars and the 1993 World Trade Center bombing hit the insurance industry with under $1 billion in losses.

Insurance losses from the latest tragedy are spread among many of the world’s largest and strongest insurers, such as Chubb Group (operating companies rated “AAA”), which has reported a maximum exposure of $200 million for property claims, and Swiss Reinsurance Co. (“AAA/Stable/A-1+”), which has reported $1 billion in expected claims. The insurance coverages likely to be most affected include life, disability, workers’ compensation, health, business interruption, property, and general liability.

S&P will be in touch with insurers in the coming days/weeks and will assess the impact on individual insurers.

Total life insurance losses are expected to be in the low, single-digit billions of dollars, which is not likely to cripple the industry. There may also be some delays in payments on life insurance policies as the identification process is completed.

Concerning the many technical questions that insurance analysts must now ask in relation to the terrorist acts, the most significant are considered to be as follows:

— 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? This is an important consideration for the industry as definition of the losses either as a catastrophic single event or as a series of separate large claims will have a major bearing on which insurers and reinsurers eventually prove liable for the losses.

— 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? Reinsurance pricing could substantially firm in the wake of this catastrophe. After Hurricane Andrew struck in 1992, the reinsurance industry enjoyed substantial pricing flexibility over the two years that followed as the industry benefited from the hardest reinsurance market in memory. This much-needed pricing increase will help the reinsurance industry, which is only starting to see rate improvements after several years of underpricing.

S&P confirmed that its insurer and reinsurer financial strength ratings already incorporate allowance for near-term volatility caused by changes in the economic cycle and the periodic occurrence of major losses. Nonetheless, certain individual ratings may come under pressure in due course if claims and asset value reductions are found to compound existing weaknesses and lead to a permanent reduction in financial strength due to a seriously depleted capital base or loss of financial flexibility.

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