In light of rising estimates of losses from the World Trade Center tragedy, some sectors of the insurance industry could suffer significant damage to their financial stability, according to a new assessment by Weiss Ratings Inc.
Workers’ compensation insurers are probably the most vulnerable. They appear to have suffered the largest losses in proportion to their overall business, with estimates ranging from 3.9 to 9.3 cents in losses per dollar of total premiums collected in 2000. At the same time, many insurers concentrating in this line of business were among the weakest in the industry in terms of their ability to withstand this kind of a shock. In 2000, the failure rate among workers’ comp insurers was already high – 12 times higher than the failure rate of all other property and casualty insurers combined. Among the 205 insurers that write workers’ comp insurance in New York, 12.2 percent are rated “D+” (“Weak”) or lower by Weiss.
“The big wild card in this analysis is pinning down how much risk was sold off to foreign reinsurers in each situation,” commented Martin D. Weiss, chairman of Weiss Ratings Inc. “Companies that retained too much of the risk will be severely impacted. Those that acted primarily as intermediaries will come through with barely a dent.” Potential claims on liability insurers stemming from deaths could be as high as $20 billion according to Milliman UK, an actuarial consulting firm. In contrast, the total premium collected on all lines of liability by insurers doing business in New York was only approximately $3.7 billion in 2000. However, some of the exposure is borne by foreign reinsurers, thus reducing the impact on U.S. carriers.
Damage estimates for property and business interruption range from $13.5 billion (Tillinghast Towers-Perrin) to $45 billion (Milliman UK) — very large numbers in comparison to the $1.8 billion in premiums collected by insurers doing business in New York last year. Overall, there are 318 companies with at least $1,000 of commercial multiple peril, non-liability premium in New York. Among those, 35 companies are rated “weak” or “very weak” by Weiss.
For life insurers, the impact is bound to be far less severe. Even the highest estimates to date — up to $8.5 billion in life claims, according to Milliman UK — represent only 9.9 cents in damages per dollar of premium. Moreover, most life insurers are in better shape financially and generally have the capital to weather the storm. Among the 498 life insurers doing business in the tri-state area, only 40, or eight percent, are rated “weak” by Weiss.
What Lies Ahead?
The evolution of insurance in the UK may provide some clues regarding the potential impact of terrorist attacks on the United States insurance market. British insurers typically contribute premiums to a national pool covering terrorist acts, which pays out up to a limit of 110 percent of its surplus, with the government covering any remaining claims. However, any forecasts of what might happen in the U.S. are still very speculative, and the future insurance coverage for the nation’s airlines — involving some 80 companies collecting aircraft insurance premiums totaling $14.8 billion — is especially uncertain.
“Overall, with the exception of workers’ comp insurers, the industry is well capitalized and should not suffer a rash of failures. Moving forward, however, the events of September 11, 2001 could forever alter the cost, structure, and availability of insurance policies. They will be more expensive. They will cover less. They will be harder to come by. And, there will probably be some federal government participation,” predicted Dr. Weiss.
Looking beyond the immediate damages, Weiss believes that the greater long-term threat to the insurance industry is the negative impact of a broad economic decline: “Historically, insurers lose money in a recession due to loss of business, rising claims and declines in their investment portfolios,” Weiss commented. “With the average insurance company allocating about a third of its investments to corporate bonds and equities, this is a big concern for the future.”
Weiss issues safety ratings on more than 15,000 financial institutions, including HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, banks, and brokers. Weiss also rates the risk-adjusted performance of more than 11,000 mutual funds.
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