S&P’s Issues Report on Sept. 11 Insurance Payments

September 5, 2002

The terrorist attacks of Sept. 11, 2001, will go down in history as the property/casualty insurance industry’s largest single loss event, with the net-loss estimates posted by insurance entities standing at about $30 billion. However, the ultimate payout will take years to determine, Standard & Poor’s Rating Services said in a recently released report.

“The problem with Sept. 11 losses is that we don’t know what the final cost could be because the liability losses could still go through the roof,” said Steve Dreyer, managing director of S&P’s Insurance Ratings Service.

To date, only about 20 percent of victims’ families have elected to forego lawsuits to qualify for government compensation from the Sept. 11 Victim Compensation Fund. That leaves the door open to liability actions from about 2,400 families. “Families are still debating whether they want to settle for the government payment,” said Dreyer. “It’s the individual lives that are such an intangible. How do you value that?”

Airlines and the Port Authority of New York and New Jersey could be among defendants making claims against their insurance policies. “The typical liability per plane is about $1.5 billion,” explained Frederic Sklow, a S&P’s director and insurance credit analyst. “They’ll probably fully exhaust that.”

A key issue is whether the plane crashes at the World Trade Center count as one or two events for insurance purposes. This amounts to a $3.6 billion question in the case of World Trade Center leaseholder Larry Silverstein, currently in legal proceedings with a group of 20 insurers led by Swiss Re.

“The wildcards are the same today as they were on Sept. 12,” commented Dreyer. “What was unknown then is still largely unknown.”

The Sept. 11 catastrophe has opened up cracks in the insurance industry, as demonstrated by a S&P’s CreditWatch action on triple-‘A’ rated Munich Reinsurance Co. in July 2002. “Sept. 11 exposed the flaws in property/casualty,” said Dreyer, “and with investment losses, the industry can’t paper them over as it used to.” Accustomed to writing business at a loss but compensating for it by earning healthy investment returns, insurers have recently felt the havoc wrought on investment portfolios when equity markets tumble and corporate debt loses its creditworthiness. “These factors are exposing the underwriting shortfall insurers have had over the past few years,” said Dreyer. “They’ve lost their cushion, and they can’t rebuild capital as fast as they would have liked,” he added.

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