Insurance losses from the Sept. 11 terrorist attacks, the largest loss in insurance history, will have little impact on the cost of auto and homeowners insurance next year, according to the Insurance Information Institute (I.I.I).
But the costs of property and liability insurance for commercial businesses are expected to increase, in some cases significantly, due to multiple factors, from rising costs to a broader demand for insurance protection. Insurers are expected to pay at least $40 billion in claims from the terrorist attacks, most of that to commercial businesses.
Insurance premiums nationally for private homes and automobiles will rise about six percent in 2002, the same as 2001. Premiums for commercial businesses, after decreasing over the past few years, will increase by about 30 percent on average in 2002, reflecting market forces that existed both prior to and after Sept. 11. Commercial prices can vary widely depending on the nature of the risk, type of business or structure, and location.
In the personal lines of property and casualty insurance, primarily homes and automobiles, rising repair costs, medical costs, jury awards — and even mold claims — account for the need for rate increases across the country.
“Individual homes and cars are not terrorist targets. Increases are really unrelated to September 11,” said Dr. Robert Hartwig, I.I.I. vice president and chief economist. “Rates were flat for most of the 1990s. Now they are generally going up, but should mean a relatively modest $30 for the average homeowner and $50 per vehicle.”
The Insurance Information Institute projects commercial insurance prices will rise 30 percent on average for policies being renewed for 2002. About half of that increase will be due to market forces created by the events of Sept. 11, including the changing nature of risk and an increased demand for insurance at a time when available capital, particularly for reinsurance, has shrunk drastically. Larger increases will occur with certain lines of insurance, such as aircraft coverage, or in circumstances where businesses own high profile structures, have large concentrations of people, and operate in large metropolitan areas.
“We don’t yet know how large the insured loss will be for these terrorist attacks, but we know it will be the most significant in history,” commented Hartwig. “Beyond the physical destruction, what happened at the World Trade Center is the first life insurance catastrophe in our history, as more than 3,000 people perished. It is the first workers compensation catastrophe in our history. This tragedy will change the way businesses look at risk in the future and insure that risk.”
“This remains a very competitive industry. Even with these increases,” stresses Hartwig, “commercial policyholders have only seen premiums increase on average by one percent per year during the past decade. Over the next few months, market stability – and competition — will begin to return. The temporary federal backstop currently being considered in Congress can help speed this process, before there is further damage to the broader economy.”
Insurers are moving quickly to meet the changing needs of their customers despite tremendous uncertainty in the marketplace. Insurers are raising capital in order to be able to write more insurance since, in the aftermath of Sept. 11, businesses and individuals are asking the insurance industry to underwrite more risk.
“Terrorism represents a new risk to our society and it will primarily affect commercial insurance lines,” Hartwig added. “There is only about $80 to $100 billion at present to cover future commercial catastrophes — whether from terrorist attacks, hurricanes or earthquakes. Insurance premiums are rising, but over time, the industry will have the capital necessary to cover this expanded risk.”
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