Not since Desert Storm a decade ago has the insurance industry had to seriously consider warlike activities, let alone a disaster of the nature that occurred in the terrorist attacks on September 11.
While early statements from the local industry indicate most Australian insurance companies, aside from QBE, are not highly exposed, the full effects of the attacks on the global industry are unlikely to be felt for some time.
At this stage only one thing is certain — the attacks will give rise to some of the biggest claims on record and could even result in the collapse of a number of large industry players, including industry stalwart Lloyd’s of London.
Industry players are estimating Lloyds will incur a loss of about US$1.5 billion, although the company is yet to announce an official figure. Already struggling after three years in the red, Lloyds syndicates are exposed to aviation, workers compensation, property reinsurance, whole account reinsurance, excess and umbrella casualty, life, disability and event covers.
While assessments for the solvency of individual syndicates are still being compiled, a recent report by Morgan Stanley states “the World Trade Centre loss will certainly bring down several Lloyds syndicates”. This is because Lloyds has a habit or reinsuring internally, creating reinsurance ‘spirals’ among its members, and Morgan Stanley is betting on at least one spiral as a result of destruction of the twin towers.
“It now appears inevitable that Lloyd’s security will be tapped to cover uncollectable claims, and it’s quite possible that Lloyd’s security may be exhausted by those claims given the magnitude of the WTC loss,” the report says.
Whether Lloyd’s security (which comprised £323 million in cash at year end 2000, reinsurance of up to £500 million over five years from a Swiss Re-led consortium and contingency funding) can accommodate the loss may not be revealed for many years, and will depend on the propensity of corporate capital partners to recapitalise troubled syndicates.
Although it’s too early to put any real value estimates on the total cost of the attacks, the economic cost has been estimated to date at around US$100 billion, and Munich Re is estimating the cost to insurers could exceed US$40 million. Losses of $5 billion will be incurred just through the destruction of World Trade Centre itself. Business interruption losses are anticipated to total $3 billion, and workers’ compensation and aircraft hull and related losses will respectively cost $1 billion.
Many of the major global insurers and reinsurers have issued statements declaring the impact on their businesses will be minimal with only a short-term effect. However Morgan Stanley’s report claims, “some of the numbers being reported by companies are likely significantly understated, mostly because they are net of reinsurance recoverables that will never be collected".
The report goes on to say that, “property and aviation loss of this nature would be fatal to more than a trivial section of the market,” and that “an insurer that voluntarily discloses its gross, as well as net, losses from the disaster, would go a long way in helping É understand its real exposures.”
The ‘big three’ global reinsurers, Munich Re, Swiss Re and Berkshire Hathaway, and possibly also Employers Re, probably have pockets deep enough to cope with the scale of the claims. Swiss Re has already announced it is anticipating claims in the vicinity of US$750 million and Munich Re has issued a statement claiming its exposure will be around US$1 billion; Berkshire Hathaway is yet to make a statement.
Aside from the large reinsurers, it is expected that, similar to the situation following Hurricane Andrew when eight small US reinsurers became insolvent, some of the smaller reinsurers will almost certainly disappear, although it’s too early to say which they will be. The US government is considering a bail-out package for insurers, although many industry players are wary of this and would rather see the market deliver its own solution.
To avoid insolvency, some insurers may delay payments and look closely at whether the war exclusion clause might become valid for the terrorist attacks. Under many policies no benefit is payable under warlike conditions, whether war is declared or not, although terrorism does not usually fit the definition of war. Indeed, most property-casualty policies cover terrorism, but not war, including undeclared or civil war, which is defined by Cinncinati Financial as: “warlike action by a warlike force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents.”
As the warlike-posturing by the US and its allies increases, insurers around the globe are looking closely at the risks associated with covering people working in the armed forces, doctors, nurses and others likely to be affected, should George W Bush’s war on terrorism be officially declared a war by the US Congress or any other country. (For a war to be official, it must be declared by Congress, and until that stage, insurers are required to treat the events of September 11 as a criminal act.)
Whatever the outcome, in Australia, the most likely effect will be an increase in premiums. According to Zurich’s head of life risk, Michael Harrison, in the Australian market, “in the immediate term, the effect will be relatively minor".
Harrison believes Australian insurers will take this opportunity to review pricing.
“It’s the sort of event that will force people to look at pricing and there is some scope for increases. There have been other pressures on pricing in recent times and some will say this was the straw that broke the camel’s back,” he said.