Reinsurers Face 'Moment Of Truth'

The Sept. 11 terrorist attacks on the United States represent a“moment of truth” for the reinsurance community, according toanalysts at two major rating agencies. And those who rise to theoccasion, paying claims while still remaining financially strong,are the same reinsurers who will reap the benefits of an improvedmarket in years to come, they say.

Analysts from Moodys Investors Service in New York and Londonreferred to this “reinsurers moment of truth” during a recentconference call for the investment community. The attacks, theysaid, are likely to accelerate the shakeout of the reinsuranceindustry.

“Reinsurers ability to withstand temporary financial stress inorder to capture the benefit of post-loss pay-back will be criticalto their continued competitive viability,” said Alan Murray, vicepresident at Moodys.

“The largest and best-capitalized reinsurers–almost irrespectiveof the extent of their losses–will benefit most from marketrecovery and heightened credit sensitivity among brokers andcedents,” he said, noting that smaller and marginal reinsurers areparticularly vulnerable.

Although most reinsurers will have the financial resources tohandle claims and cash flow without difficulty, “their reducedcapitalization may constrain their ability to benefit from marketrecovery, or may lead their parent companies to question theircommitment to reinsurance,” Mr. Murray continued.

Middle-market reinsurers and new entrants will be challenged todemonstrate their added value “in a consolidating and increasinglycredit-sensitive reinsurance marketplace,” he said.

Hosting a similar conference call two days later, analysts forStandard & Poors in New York and London fielded a series ofquestions about the willingness of reinsurers to pay the claimspresented to them, without litigation or arbitration hassles overclaim definitions and exclusions.

“Are companies indicating that they are anticipating refusals byreinsurers to pay claims based on the causes–acts of terrorism oracts of war?” one caller asked during the S&P conference. “Wehave heard no insurers mention that theyre facing issues ofrevocation of potential claims” because of such clauses, said MarkPuccia, an S&P senior analyst in New York.

Speaking from London, Christian Dinesen agreed. “The very largeestimates being posted by the reinsurers indicate that they arefacing up to some very large payments,” he said.

“Considering that these are very substantial figures that theyhave to put up, if they felt at this stage that they had anydefense or any mitigating circumstances, I would have beenextremely surprised if they hadnt mentioned them,” he said.

Mr. Puccia said that recent rating actions announced by S&P,lowering the ratings of two insurance organizations and putting 15others on “CreditWatch negative,” do not anticipate reinsurersdenying claims based on act of war or other types of exclusions.“We believe reinsurers will pay,” he said.

To the extent that reinsurers do not meet the obligationspresented to them by primary companies, there are a number ofprimary companies that have established net exposures that heavilydepend on reinsurance recoverables, he said. The difference betweenthe net claims for these companies and gross claims can be “quitesubstantial,” he said.

That holds true even within the reinsurance community withrespect to retrocessions, he said.

When asked to quantify that difference later on, Mr. Pucciasaid, “it varies all over the board.” While the spread might not beas large as a 10-times figure suggested by one questioner, it couldbe “many, many multiples” for some companies, Mr. Pucciaconceded.

Taking a slightly different tack than Mr. Dinesen, anotherS&P analyst, Don Watson, also tried to explain why S&Passumes that reinsurers will pay the types of claims that willarise from the terrorist attacks. Speaking from New York, Mr.Watson said: “The claims that are likely to arise here are muchclearer than you have in something like asbestos or productliability, where it's not clear about whether a loss has occurredor what caused it. Here its pretty clear.”

“I think the reinsurance companies realize that thats whattheyre in business for. They are here to pay these types of claims.And I really would be surprised to see much in the way of effortsto get out of their obligations here,” Mr. Watson added.

“The point to understand is that for the reinsurers who denyclaims, it would affect their market position going forward. Itwould affect their ability to do business in 2002 and beyond.Because if theyre not willing to pay claims on a catastrophe ofthis nature, one would have to wonder what their policies areworth,” he said.

Mr. Watson did say that one big issue that will be debated iswhether the attacks should be considered as a single event or asmultiple events. “That is a definitional one and I think the marketpressure is going to come to a consensus opinion on that ratherquickly. But that should be the extent of it,” he said.

He noted that for aircraft losses, as most companies put numberson their potential losses, they are looking at the attacks asmultiple events. But for the World Trade Center itself, mostcompanies are considering the attacks as a single event, hesaid.

“If it stands as a single event, these loss estimates shouldhold pretty firm. If courts or public opinion later change that,then we might see multiple increases” in loss estimates, hesaid.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 1, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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