CICA Told 9/11 Showed Underwriting Defect

By Caroline McDonald

NU Online News Service, March 5, 11:49 a.m. EST,Tucson?The Sept. 11 terrorist attacks on the United Statesexposed a flaw in the reinsurance industry's modeling process, aninsurance executive told a captive insurance companies meeting hereyesterday.

Commenting during a panel discussion at the Captive InsuranceCompanies Association annual conference, John Alfieri, executivevice president at Munich-American RiskPartners in Princeton, N.J.,said a post-catastrophe review revealed that the industry's modelsfor the aggregation of different types of risk "were actuallyinadequate."

"For the first time in our history, we had aviation riskscorrelating with fine arts floaters, correlating with businessinterruption losses, correlating with excess [workers'] compaccumulations."

For individual policies, Mr. Alfieri said, underwriters had donea good job. A review of every policy exposed to the Sept. 11attacks showed that "while we wish we would have charged a littlemore, we didn't really make any bad underwriting decisions."

He noted that prior to Sept. 11, the reinsurance industry wasexperiencing a turnaround. But, Mr. Alfieri said, the effects ofSept 11 couldn't have come at a worse time, "because terms andconditions were the most flexible they have ever been."

In 2001, there were $12 billion in catastrophe losses, he said,noting that "by itself, without 9/11, it would have been in thetop-five worst years in the insurance industry" from a catastrophestandpoint.

As for terrorism, he said that "as a reinsurer, we can excludeit overnight. From a policy-issuing standpoint, though, it takes along time to get those exclusions approved," creating a gap incoverage for primary carriers and their clients.

After Sept. 11, "there was a significant time out becausereinsurers didn't know what their capital base was to pricebusiness," he said. "Everything came to a screeching haltovernight. We were not allowed to quote business until we had someanswers." Reinsurers didn't know if they could withstand anotherterrorist attack, he said.

Is there an increased insurance demand as a result of Sept. 11?"Absolutely," he said, adding that the risk management profession"is under an incredibly bright spotlight right now. Every one ofour clients feels it." Problems in securing fronting carriers forcaptives, for example, are becoming "significant as we speak," hesaid.

As a result of Sept. 11, about 25 percent of global reinsurancecapacity is gone, he said. "We're running out of adjectives toexplain what's going to happen over the next 12-to-18 months," headded. A capital infusion of around $25 billion, including newBermuda capacity and added capital from existing players, is "notenough" to offset Sept. 11 losses, he emphasized.

Describing the tumultuous climate of the current reinsurancemarket, Mr. Alfieri noted that in the movie "The Perfect Storm"there is a line ?We're running out of adjectives to explain thisstorm." At this point, he said, "we are running out of adjectivesto explain what is happening from the reinsurance perspective."

"What are we telling clients? Go back to basics," Mr. Alfiersaid, noting that risk managers must remember the "300-29-1" rule.He explained that "for every major catastrophe or lost-time injury,there were 29 very small claims. For every 29 very small claims,there were 300 accidents for which there was no injury." Riskmanagement programs, he said, must concentrate on preventing arecurrence of those 300 accidents that didn't result in a claim, aswell as the 29 small incidents that did.

Guy Ragosta, managing director of Willis in Burlington, Vt.,said he spends much of his time helping companies set up newcaptives and deciding on a domicile. Many new domiciles have beenformed, but Mr. Ragosta said that, "unfortunately, they don'talways have the infrastructure" to support the business.

One recently formed domicile, South Carolina, "seems to havetaken the time and are investing in the infrastructure, so theymight be a possibility," he said.