Terrorism Losses To Hike Combined Ratio Up To 120

An estimated $30 billion-plus loss from terrorist attacks willgive the p-c insurance industry “a record-poor” year-end combinedratio of 119.9, according to the Insurance Services Office Inc.

The Jersey City-based ISO said that the projected 2001 combinedratio–the percentage of each premium dollar spent on claims andexpenses–will be nearly 10 points worse than last years 110.1figure.

The losses from Sept. 11 alone have deteriorated the combinedratio by 6.3 points for the calendar year, according to an ISOrepresentative, Christopher Guidette.

Commercial lines writers, according to ISO extrapolations, couldsee a combined ratio exceeding 130 for the year.

ISO noted that even before Sept. 11, the p-c industry's totalfirst-half 2001 combined ratio was 111.2.

ISO anticipates that of the $30 billion in Sept. 11 lossesanticipated thus far, “we see $25 billion hitting the books for2001 and $5 billion hitting the books in 2002,” said Mr.Guidette.

He noted that ISO is having “a lot of difficulty in coming upwith hard estimates. What were dealing with is a lot of long-tailclaims where the full extent of the loss cant be knownimmediately.” He cited business interruption and rental incomeclaims that require reconstruction of potential income, wheredocumentation might have been destroyed.

Additionally, Mr. Guidette cited delays because of difficulty inreaching areas of the still-smoldering World Trade Center site andproblems in assessing damage to buildings with fissures infoundations.

His remarks were echoed by Joseph Annotti, a representative forthe National Association of Independent Insurers in Des Plaines,Ill., who said in an e-mail: “We are not yet projecting totalestimated losses because of the uncertainty over whether or notmany buildings in the area are totaled or repairable.”

The ISO terrorist loss estimate is close to the number in astudy for the New York City Partnership and Chamber of Commercecalculated by the consulting firm of A.T. Kearney in Plano,Texas.

Kearneys impact study for the World Trade Center loss estimatedthat insured benefits were at least $37 billion, including between$4.5 billion and $5.5 billion in life and disability insurance. Thecompanys high-range estimate was $50.2 billion, including life anddisability.

“Its still so early,” cautioned Tom Dente, Kearney vicepresident. The numbers, he said, “are certain to grow.”

Kearney said that $17 billion of the $37 billion total wouldlikely be paid within the first year after the attacks, with atotal of $23 billion paid out by the second year. The full $37billion in claims are not expected to be paid out until the sixthyear after the 2001 attack, or perhaps even later.

The consultants said while it is difficult to estimate at thistime, “an overall [premium] increase of 20-65 percent in theprimary commercial property and casualty market is likely to occuras the cumulative effects of past underpricing of risk are adjustedin new coverages.”

ISO President and Chief Executive Officer Frank J. Coyne saidthat according to ISO calculations, total gross catastrophe lossesfor the year “could easily approach $50 billion.” He added that“taking inflation over the past 10 years into account, thatstwo-thirds more than the losses of 1992, when the industry facedHurricanes Andrew and Iniki.”

ISO reported that even before Sept. 11, net losses onunderwriting had ballooned almost 40 percent from 2000 results,with near-record catastrophe losses for the second quarter puttingfirst-half cat losses over the $6 billion mark.

Through June, ISO said, p-c insurer net income was $2.5 billion,down 75 percent from the $10.5 billion recorded in the same periodthe year before, while surplus dropped 8.5 percent to $298 billionfrom $326 billion in first-half 2000. Net investment income for thefirst half fell 5 percent to $18.4 billion, while realized capitalgains dropped 21 percent to $5.5 billion.

Mr. Coyne said projected premium growth could be 12 percent thisyear, but even that rapid gain would not prevent the 120 combinedratio figure at year-end, he noted.

ISO also noted that new capital is flowing into theindustry–estimated at over $20 billion raised or in the pipelinethus far. “Capital inflows are a good indicator of how investorsfeel about the p-c industrys prospects,” ISO said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 26, 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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