Will there be a swift movement of commercial insurance buyers out of the market toward self-insurance?

These were the early answers:

The possibility of downgrades and insolvencies appeared high, with many companies being put on watch by various rating agencies.

Prices will rise “a lot.”

With a heightened awareness of risk, buyers will stick with the insurance mechanism in spite of rising costs.

A year later, only the second prediction turns out to be on target.

Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, said the insolvency of Japans Taisei, a member of the North Carolina-based Fortress Re aviation pool, is the only failure that can be directly linked to Sept. 11, adding that the unrelated Nov. 12, 2001, crash of American Airlines Flight 587 further “was the straw that broke the camels back” for the company.

Explaining why there were not more bankruptcies from Sept. 11, he said: “It was a testimony to how the global insurance market spreads risk efficientlyfor a type of risk that hadnt even been anticipated before. That was made possible by the widespread use of reinsurance.”

While the risk was spread among 119 different companies, by Mr. Hartwigs count, “for the most part, it was the larger companies having the larger loss,” he said.

“If we go back two years, the industry was alleged to be grossly overcapitalized,” added John Kollar, vice president of consulting and research for the Insurance Services Office in Jersey City, referring to the general health of the industry before Sept. 11.

Unlike insolvencies, rating downgrades have been common in the last 18 months, according to James Auden, senior director at Fitch in Chicago. “Weve had a lot. But some were probably coming” well before Sept. 11, he said. He noted that Fitch did an industry reserve study last summer, which wrapped up right after Sept. 11, leading to a number of downgrades “attributable to a poor market in the late '90s and 2000–underpricing and underreserving.”

“Some companies may have been on the bubble, and 9/11 led to further downgrades,” he said. There was another round of downgrades when insurers released fourth-quarter results, he noted. “We saw a large number of charges. Some were 9/11 revisions. But others were for discontinued operations, reserve adjustments, and restructuring charges. There was a lot going on.”

Keeping down the number of downgrades, “we looked at how companies responded to the loss in terms of replenishing capital. That was a big part of the exercise,” he said, noting that some companies with sizable losses demonstrated an ability to refill their coffers.

Responding to the pricing question–specifically, what portion of rate hikes can be attributed to Sept. 11–most analysts said it was unanswerable. “I dont think the people making those decisions could exactly say,” Mr. Kollar said. “There was so much stagnation in pricing for so many years that the pent-up demand for price increases was there.”

Mr. Hartwig, however, shared some numbers. Pre-Sept. 11, commercial property and liability was rising in the 10-to-15 percent range, and workers' comp close to 13-to-15 percent. Today, commercial property and liability are rising about 30 percent, with workers comp hikes of 20-to-25 percent.

“What you can say is roughly half of the 30 percent increase seen on average on commercial property is directly a consequence of the post-9/11 environment,” Mr. Hartwig added, indicating that the line is “clearly on a higher risk plateau” as a result of the event. “In comp, you can argue that maybe a third of it is.”

Noting that “there is evidence of more interest in self-insurance and the formation of captives,” he called the trend a “rational economic response to higher prices.” However, he added that “the danger of this is that any insureds think by joining a pool or self-insurance group, they are going to wind up somehow in insurance heaven.” He warned that when a widget-maker self-insures, it enters a new business–”one that its not very experienced in [and] could be very costly, if you dont understand the risks,” according to Mr. Hartwig.

Mr. Auden said insureds are taking more risk, even if theyre not going bare, by taking higher deductibles and because insurers are offering lower limits.

“It was such a surprise–the event, and then the market reaction. Maybe thats the next step,” he said, referring to self-insurance. “Im not sure whats going to happen, but you can see that as kind of the next reflexive move in the primary market.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 9, 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.