Agents Bear Great Burden After Attacks

The wheels of commerce in a modern economyare lubricated by easy access to capital, highly liquid creditmarkets and the ability to transfer risk to entities better suitedto carry such exposures.

Lose access to capital or credit markets–as the majority ofbusinesses do at some point–and resourceful management will mostlikely find a way to persevere until the crunch eases.

But lose the ability to transfer risk, even temporarily, and thewheels of commerce come to a screeching halt–literally. Wheninsurance becomes unavailable, the consequences are very oftenswift and severe–planes dont fly, ships dont sail, loans arent madeand buildings dont get built.

Insurance producers represent the front line in the transfer ofrisk for the six million businesses in the United States and its281 million citizens. Each and every day they place coverage thatkeeps planes in the sky, ships at sea, cars on the road, and makesthe dream of homeownership possible for millions of families.

This is an awesome responsibility. Collectively, people andbusinesses will pay an estimated $330 billion in property-casualtyinsurance premiums this year to persuade insurers to worry about awide variety of problems, big and small, that theyd rather notthink about. (Paying for damage from terrorist attacks, forinstance!)

Making sure they get the right coverage at the right price isthe responsibility of agents and brokers. When coverage suddenlybecomes more expensive, more restrictive and in some casesunavailable–as is expected to be the case in the wake of the Sept.11 attacks–the job of a producer becomes much more difficult.

While it is insurers and reinsurers who impose restrictions oncoverage and raise the rates, the difficult and thankless (butindispensable) job of explaining the changes is left largely toproducers.

With respect to the events of Sept. 11, producers must getcustomers to understand that while insurers are generally eager toseek out new risks wherever and whenever they arise, often on veryfavorable terms for the policyholder (as was the case during thesoft market of the 1990s), insurance markets are occasionally sotraumatized that the willingness to absorb certain types of riskdisappears.

The terrorist attack of Sept. 11 was clearly such an event. Withour nations leaders warning that additional attacks are all butcertain and with an open-ended armed conflict under way, insurersand reinsurers around the globe have understandably becomereluctant to include coverage for terrorist acts in the policiesthey sell to their customers in the United States.

Offering such coverage, in the view of many insurance companies,would be equivalent to selling insurance on a house that is alreadyon fire.

Informed customers might be aware that insured losses in theSept. 11 attacks could exceed $40 billion, nearly three times the$15.5 billion insurers paid to rebuild South Florida in the wake ofHurricane Andrew.

While few clients are likely to shed tears for the insuranceindustry, producers should emphasize that it is not the enormity ofthe losses that has caused certain insurance markets to shrink. Thedecision by insurers to exclude or severely limit coverage forterrorist acts is the rational economic response to the unboundeduncertainty over the number and cost of future attacks.

Insurers are justifiably concerned that additional attacks of asimilar magnitude or a sequence of attacks could deplete theindustrys capital and lead to a major solvency issue.

Customers in urbanized areas, especially those in larger citieswith facilities in landmark structures, are likely to understandthe additional risk and financial burden terrorism imposes on abusiness. These clients have probably tightened their own securityand changed certain operating procedures, incurring significantcosts as a result.

Rationalizing price increases and terrorism exclusions to aclient in Midtown Manhattan or the Chicago Loop is one thing; it isquite another to convince a client in Boise, Idaho or Lafayette,La. But as citizens of the United States, we have necessarily cometo accept the common-sense notion that we face the risk ofterrorism as a nation, not as individuals. Our concept of nationalsecurity was changed irrevocably on Sept. 11. We now live in ariskier world and must be willing to accept changes in the way wemanage that risk.

The insurance industry is working hard to find a way to providecoverage for terrorist attacks. A variety of proposals thatestablish the federal government as a reinsurance partner have beendiscussed.

The case for the federal government as a financial partner isbased on sound economics. Businesses unable to transfer risk–orconcerned that insurers wobbly finances will lead to insolvenciesand the nonpayment of claims—will likely become more cautious andwill cease or reduce operations and scale back plans forexpansion.

Paralyzed by fear, the cumulative impact of a crisis inconfidence would be economically devastating. A federal backstopprovides the necessary level of confidence businesses deemnecessary to proceed with these plans.

Formally establishing the federal government as a financialpartner is also an affirmation of the obvious public policy factthat in the event of another massive terrorist attack, thegovernment will wind up paying much of the tab anyway.

Producers will likely need to combine the patience of Job withthe diplomatic skills of Henry Kissinger when it comes toexplaining and placing coverage for clients over the next fewyears. Nevertheless, we now live in a riskier world and must bewilling to accept new methods for managing that risk.

Robert Hartwig, Ph.D., is vice president and chief economistat the Insurance Information Institute in New York. He can bereached at [email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 29, 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.

Contact Webmaster