September 11, 2001:Its Impact on the Insurance Industry

Outline

Insurance Coverage for the World Trade Center

The Impact of the Loss on the Insurance Industry

Excluding Terrorism

Federal Role

Coverage for Terrorist Acts

Future Developments

Property Insurance on theWorld Trade Center

• Cause of Loss– Aircraft– Explosion– Fire

• Type of loss– Direct

• Real property• Personal property

– Consequential• Loss of income

• Potential Exclusion– Act of War

Other Covered Losses in World Trade Center

• Life• Health• Disability• Workers

Compensation• Liability

World Trade Center Losses Current Estimate $50-55 billion

Property – Towers 1 and 2 3.5 Other 5.0

Business Interruption 10.0Workers Compensation 3.5Aviation 0.5Event Cancellation 2.0Liability – Airlines 3.5

Other 20.0Life 4.0

The Effect of the WTC Loss

• Primary insurers will pay approximately 1/3 of the WTC losses

• Reinsurers will pay approximately 2/3 of the loss• The insurance industry can afford to pay for the

WTC loss• The industry cannot afford to cover another loss of

this magnitude in the near future• When capital levels are replenished, the industry

would be able to withstand another major loss

Excluding Coverage for Terrorist Acts

• Reinsurers are now excluding terrorism coverage– Many reinsurance contracts renewed 1/1/02

– These contracts do not provide coverage for terrorism

• Primary insurers filed for terrorism exclusions• 45 states (as of 2/22/02) allow terrorism exclusions• Primary insurers are beginning to exclude terrorism

as policies renewed• In states that do not permit an exclusion, commercial

property coverage will be difficult to obtain

Factors Affecting Exclusion

• Workers Compensation– No exclusions for a particular event allowed

• Standard fire policy language– Laws in 30 states require use of standard fire

policy– Covers all fire losses, regardless of cause

Coverage for Another Terrorist Act

• If the loss occurred now, or in the near future, primary insurers would bear most of the cost– Solvency concerns

• If the loss occurs after insurers have added the exclusion, the individuals and businesses would bear most of the cost

Examples of Problems Caused by Lack of Terrorism Coverage

• Property owners without adequate coverage– Particular problem for “trophy” properties

• Cost increases for property coverage– Double the cost for 1/5th of the coverage

• Lenders requirements for insurance coverage– Many borrowers are in violation of loan covenants

• Financing for new construction projects is being withheld

Federal Role in Terrorism Coverage

Terrorism Risk Protection Act (H.R. 3210)– Provided for a loan program for insurers

• 90% of losses over $1 billion• If losses exceed $20 billion, premium surcharge

– Tort reform provisions• Ban on punitive damages (other than perpetrators)• Limits on noneconomic damages

– Sunset provision 2002 (could be extended to 2004)– Passed the House of Representatives on 11/29/02– Not passed by the Senate

Alternative Federal Proposals

• Federal government as a co-insurer

• Retention of $10 billion

• Government would pay 90% of losses over retention

Coverage for Terrorism

• A few companies are selling specialized terrorism coverage– High deductibles– Low limits– High premiums

Future Developments

• Insurers are concerned over concentration of risk in Workers Compensation

• Large premium increases are impacting companies of all types

• Construction work is slowing down• Lack of terrorism coverage by itself could

cause serious economic problems• Risk sharing for terrorism losses will develop