Total World Trade Center Losses Still Far FromSettled

A year after the Sept. 11 tragedy, there are still no rock-solidestimates of event-related ultimate losses for theproperty-casualty insurance industry. However, the range ofpotential losses has narrowed considerably.

What was a range that extended from $15 billion a day after theattack to $100 billion a few weeks later, has now settled in ataround $40-to-$50 billion.

While experts report the new, tighter range with an air ofconviction, they are all quick to point out that the true numberwont be known for decades, adding that insurance loss estimates formajor events tend to creep up over time.

With a handful of insurers revising their individual companyloss estimates in recent months, none of the sources contacted byNU saw any immediate need to go back to the drawing boardto make wholesale revisions to the current industrywideestimates.

“In the greater scheme of things, were probably talking aboutnickels and dimes relative to the grand total,” said RobertHartwig, senior vice president and chief economist for theInsurance Information Institute in New York.

The “nickels and dimes” of recent months include: a $500 millionboost in Munich Res estimate; $200 million for XL Capital; $100million at Royal & SunAlliance; and AXAs $85 million.

“Theres always going to be some uncertainty,” Mr. Hartwig said.But since October 2001, company revisions have been sporadic and,he points out, “they have not been enormous relative to the totalestimated loss figures out there.”

“This is nowhere near the sort of upward development we saw with[a Hurricane] Andrew or with a Northridge [earthquake],” he said.He noted, for example, that initial estimates for Andrew put forthby the Property Claims Services Unit of the Insurance ServicesOffice were in the area of $4 billion–a figure that “quadrupledover a period of about four-and-a-half months.”

“With Northridge, certain types of damage didnt emerge formonths. You dont uncover a cracked foundation in a house foryears,” he said, noting that some Northridge claims have reopened.“But with Sept. 11, it was obvious what had happened. The buildingswere destroyed. People were dead.”

He also said damage related to the Sept. 11 attacks wascontained in a compact area”a few dozen blocks of lower Manhattan,not hundreds of square miles of South Florida or California.”

He noted that there were 700,000 claim files for Andrew, whileproperty and business interruption claims for Sept. 11 only total51,000, according to the latest report from PCS released in June.“When you add in all the other types of claims, theres potentially70-to-75,000 claims (including life)–10 percent of what we saw inAndrew,” he said.

Unlike the other events, the history of World Trade Centerindustrywide loss estimates, so far, includes at least onesignificant downward revision–eliminating the high side of an earlyrange from a September 2001 Milliman U.K. report. The only miracleto arise from the tragedy–a higher than anticipated number ofsurvivors–explains the move by most analysts to discard that$70-to-$100 billion estimate.

David Sanders, Millimans U.K.-based consulting actuary, who wasone of the authors of the report, recently confirmed that the firmsinitial estimates were made the day after the tragedy, at theReinsurance Rendez-Vous de Monte Carlo, when early speculation putthe death toll at nearly 10,000.

That assumption figured prominently in its estimates forliability and life insurance losses, with liability losses assumedto be $2 million per death, and life coverage roughly $350,000 perdeath, with some upward adjustments for key-man policies. Assuming3,000 deaths (based on a figure provided by Mr. Hartwig, whocalculates 3,056 deaths for the WTC and Pentagon attacks),Millimans overall estimate lowers to roughly $52 billion.

Mr. Sanders confirmed the appropriateness of such an adjustmentin an e-mail correspondence with NU. “Another key factorin the current position is the speed of the cleanup. This wasoriginally estimated by engineers [to take] 10-to-15 months,depending on New York weather. A mild winter has helped thesituation,” he said, indicating that Milliman would “likely come upwith lower estimates for the property damage and businessinterruption category, if it repeated the exercise today.”

Tillinghast-Towers Perrin, the other major consulting firm toput out a range of estimates in September–of $30-to-$58 billion–hasnot revisited its numbers, according to its representative.

Other experts, such as Mr. Hartwig and John Kollar, vicepresident of consulting and research for Jersey City, N.J.-basedISO, have analyzed estimates of the consulting firms, as well asthose of investment analysts, adding their own assumptions tofine-tune the numbers. Mr. Hartwigs estimate is now $40.2 billion,and Mr. Kollar said ISOs range is $30-to-$50 billion.

Helping to solidify and tighten the ranges, “we now have apretty good handle on what the property and business interruptionexposures are going to be,” Mr. Hartwig said, referring to a $20.3billion estimate put forth by ISOs PCS.

Mr. Kollar explained that the estimate is based on a surveyapproach. The firm conducts surveys of insurers, agents, adjustersand others, and then analyzes and trends the data gathered.

While a June re-survey prompted an increase from an earlierfigure of $16.6 billion released in March, and although some of themost recent company revisions have been in the businessinterruption line, experts agree that liability loss estimates arenow the softest numbers.

“The liability classes may take 10-to-15 years to settle,” Mr.Sanders pointed out. “Lockerbie has only just been finalized,” hesaid, referring to the 1988 terrorism air disaster in Scotland. “Isuspect this [Sept. 11] will take as long as plaintiffs search forinsurance cover from parties other than aviation insurers andairlines.”

Mr. Hartwig said that todays estimates of liability losses arentmuch different than they were last September, when Tillinghast putforth a $5-to-$20 billion range, calling the figures “essentiallyan educated guess.” He said current industry ultimate-lossestimates assume “a certain amount of litigation will arise,” assome victims and their families will opt not to accept compensationfrom the Federal Victims Compensation Fund. According to theDepartment of Justice's Fund Web site, approximately 150 victimsrepresentatives made Fund claims as of Aug. 27.

With so many others undecided, “How are you possibly going toset a liability number if you dont know the number of claimants?”asked Steven Visner, a partner in the Actuarial Services Group ofErnst & Young in New York. Beyond that, there are questionsabout whether property and workers compensation claims willultimately turn into liability claims, with those insurerssubrogating against “security companies for the airlines, Boeing,or whoever manufactures the cockpit door.”

“I dont know if they will, but they could,” he said, reportingthat his firm, which is working on a study of subrogationactivities of six major insurers, has raised the question. “Theysaid they havent decided,” he reported.

While Mr. Visner conjectured that insurers might be reservingfor liability exposures at maximum policy limits, Mr. Kollar took adifferent view. “As an insurer, you wouldnt know whether to put upa claim or not,” he said.

Turning to the general question of whether insurers haveactually booked losses anywhere near the ultimate-loss estimates,Mr. Kollar said there seemed to be a reserve shortfall for U.S.companies at year-end. Basing his remarks on an ISO analysis ofAnnual Statement information, he said that U.S. insurers disclosedabout $10 billion, on a net basis.

Assuming ultimate losses of $40 billion, and roughly half ofthat for U.S. companies, ISO believes there could be a $10 billiondeficiency, he said.

NUs more recent compilation of insurer disclosures (seepage 11) indicates a different split between U.S. and non-U.S.companies, putting the U.S. portion at about one-third, suggestingthat only $3-to-$4 billion is unaccounted for.

“You may never actually get to that [ultimate] number in termsof reported losses,” said James Auden, senior director for Fitch inChicago, who believes the ultimate loss figure is in the $30-to-$40billion range. He referred to an October report by the ratingagency that $3-to-$6 billion could disappear as a result of finitereinsurance coverages and drawdowns on equalization reserves byEuropean reinsurers.

The report explained that primary insurers covered by finitecontracts can claim recoverables in the full amount of cededlosses, but that offshore reinsurers can discount assumed losses,recognizing future investment income. The difference, then, will beunreported in industry totals.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 9, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.