Reinsurers ‘Can’t Afford Another 9/11′

New York

The state of the reinsurance industry might not be the “calamity” declared by reinsurers in the weeks following the Sept. 11 terrorist attacks, but a federal backstop is still needed for terrorism, the head of the Reinsurance Association of America contends.

While noting that some reinsurance coverage for terrorist attacks is still available, RAA Chairman James F. Duffy, chairman of the Minnesota-based St. Paul Companies’ Reinsurance Group, quickly added that this remains a looming problem for which the federal government should provide a solution.

“The reinsurance industry cannot afford another Sept. 11,” he said during a recent speech here before the annual joint luncheon of the APIW and the New York Chapter of the Society of Chartered Property Casualty Underwriters.

He indicated that the industry, including the Washington-based RAA, will continue efforts to convince federal lawmakers to create a mechanism to help shore up the reinsurance industry in the event of another terrorist attack.

Mr. Duffy believes another such attack is likely. “Just because the Taliban has been defeated and the al-Qaida network is in disarray does not mean that there isn’t other terrorist potential around the world,” he observed.

Referring to terrorism coverage, he said that reinsurers are not in a position to be the sole providers “of something that is virtually uninsurable in this most grotesque fashion.”

Mr. Duffy admitted that convincing Congress to pass backstop legislation will be harder this year than it was in 2001, and that there is no guarantee that this year will prove any more successful. He indicated that the necessary reform might have to start at the state, rather than federal level. He revealed that the RAA is studying options in this regard.

Mr. Duffy attributed much of the current difficulties in the reinsurance and insurance industries to an “erosion” in underwriting standards, particularly over the past five to 10 years. He went on to suggest a three-pronged solution.

First, underwriters must get the facts about each risk being considered. He observed that throughout the 1990s, reinsurance clients did not provide and reinsurers did not request “good risk-assessment data.” He added that “we have let ourselves down and our customers down by not doing an accurate risk assessment.”

Second, insurers, reinsurers, brokers, agents and clients must understand “what we’re insuring,” he stated. If these parties fail to take the time to sit down with each other to iron out coverage definitions, “claims people will be settling claims in 2022″ emanating from what the parties intended in terms of coverage, he said.

Third, he recommended that underwriters forego making “big bets.”

“Reinsurance financial results for the past three years have been terrible globally,” he said. Most companies have seen their surplus and capital depleted, and are concerned as to what their next step should be, he noted. Although there is an influx of new money coming into the business, Mr. Duffy believes most of that is going toward “shoring up” the companies’ surplus and capital.

This is likely to occur more and more as companies “recognize losses in the casualty area that took place in the 1990s,” Mr. Duffy suggested.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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