Perspectives | World Trade Center Disaster: An Attack on the Insurance Business

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World Trade Center Disaster: An Attack on the Insurance Business

October 25, 2001 – New York.

Some 100 risk managers and guests listened to asurprisingly upbeat discussion on the topic of "Understanding How the WorldTrade Center Disaster Will Impact the Insurance Industry and the Risk ManagementCommunity." The occasion was the October breakfast seminar of the New YorkChapter of the Risk and Insurance Management Society. Patrick Hurley,the Insurance Manager of Consolidated Edison, was the moderator.

Michael O’Halloran, President and COO of Aon Corporation said that despitethe losses sustained by the property/casualty insurance business, he was optimisticabout the future. It was his view that the September 11 attack accelerated theupward trend in pricing that began in 2000, i.e. we were going to have a hardmarket anyway. Asked whether Aon was rethinking the idea of concentrating itspeople in another tall building in New York City, he answered that Aon wouldtake office space in Manhattan based on considerations related to the location of its area employees.

Ed Noonan, Chairman and CEO of the American Reinsurance Company, said that "We[the insurance industry] should all be proud for taking this on… [because] the industrynever collected premium for terrorism." Looking ahead, underwriters are going to have tobuild a terrorism component into their pricing models. He foresees no collection problems,although the settlement of business interruption claims will take months and years and bevery complicated. Prices will go up across the board 20% to 25% but their will be no capacityshortages as occurred in the nineteen eighties.

Thomas Motamed, Executive Vice President and COO of the Chubb Group of InsuranceCompanies said that the silver lining in the aftermath of the World TradeCenter loss is that the "public now realizes how essential insurance is." He urgedthe audience to "take pride" and to "build and repair."

 

 

Thomas Motamed, Executive Vice President and COO of the Chubb Group of Insurance Companies said that the silver lining in the aftermath of the World Trade Center loss is that the "public now realizes how essential insurance is." He urged the audience to "take pride" and to "build and repair."

  • Ed Noonan reported that he had learned that state regulators have changed their minds regarding the decision to allow Lloyds of London to cut its reinsurance trust funding to 60% of its gross liabilities — instead of 100%. Business Insurance (October 22, 2001, "NAIC allows Lloyds to cut funds in trust") had just reported that the National Association of Insurance Commissioners had approved this concession to assure liquidity of Lloyds.
  • Regarding how to finance terrorism going forward, Tom Motamed and Ed said that the U.S. may have to establish a terrorism insurance pool similar to the one that covers terrorist events that occur within the vicinity of London.
  • Mile O'Halleran urged everyone to get to work early on their 2002 renewals — and to look at captives and capital markets solutions.

Pep talks and self-congratulatory rhetoric aside, we believe the financial burdens of the World Trade Center Disaster will fall heaviest on consumers. Sadly, it has been our experience in the conduct of insurance policy audits that very few consumers buy contingent business interruption insurance. When we perform business interruption claim negotiations, all too often we uncover omissions and mistakes in the placement of property insurance. We fear that the greatest amount of loss will be uninsured.

In contrast, insurance stocks have already rebounded from their post-September 11 sell-off prices. We predict that underwriters will ask for (and too often get) whatever price increases they demand. We at Montclair Risk Advisors think it will be very important for consumers to have a hard market strategy to guide them through the difficult months that lie ahead.