Attack Losses Expected To Alter Markets

"Mid-sized companies will probably have more competitive leverage," he said. Pointing to the reinsurance market, "where four or five companies really dominate" as an example, he said that those top companies "are definitely going to have to retrench coming out of this. So, if there are some mid-sized companies who aren't affected, they're going to be on a more even footing now."

Mr. Klauber said primary carriers could see profit margins squeezed by reinsurance costs that might rise faster than primary commercial lines prices. But, he said, the stronger positive market trend for primary companies will be "an expansion of absolute dollar of risk."

Explaining the term, he said, the hundred or so insured companies affected by the tragedy–and other large commercial insurance buyers–are going to look to buy more insurance now.

"They're going to be paying a much larger dollar to the commercial insurers, who in effect will be able to pay a much larger dollar to the reinsurance companies," he said. "That's where ground zero from an insurance standpoint is. If there's really change in the industry, it's going to be in how insureds view the risk. If risk managers were saying, I can save my company 5 percent of the insurance premium or I should make money through a captive–they're going to rethink that now."

He added that risk managers are "going to take big losses because of self-insurance deductibles" on their programs. "I'm not saying that the alternative market's going to go away, but I think risk managers are definitely going to rethink how they set up their programs."

Mr. Mosher agreed. "Honestly, I think risk managers out there are looking at this and they see the risk that's there as well. They have to look at it and say, If I go alternative market, could I handle that? Theyre likely to be more accepting of rate increases for the same reason that they're getting the increases. They see this huge risk that's out there."

The other issue, when anyone talks about rate increases, is the use of exclusions, said Mr. Mosher. "We may see endorsements added to exclude the terrorist acts, particularly on landmark buildings similar to the Trade towers," he said.

Asked about the possibility that the terrorist losses might drive a move toward securitizations, the analysts had different viewpoints.

"Probably, the retro[cessional] market and some of these high-end property layers are going to take disproportionate losses on this. The retro market, that had already been contracting, will contract much further–and the high excess layers will either be priced out of existence or else [the market] will contract," according to Mr. Klauber.

"Someone's going to have to take [those] risks, and eventually, that's what might be securitized and go to alternative capital pools," he said, drawing a parallel to the excess property-catastrophe startups in Bermuda after Hurricane Andrew.

However, Keith Buckley, managing director and head of the insurance practice for Fitch in Chicago, said that while firms that cant get the capacity might want to securitize, having a big event like this might make investors wary.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 21, 2001. Copyright 2001 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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