Terrorist Attacks Magnify Effects Of Hardening Market

"Theyre already speculating that its going to put certain insurance companies out of business. British Airways has said they have a moratorium on their insurance, which means less coverage for more money," she said.

The terrorist attacks will have huge effects on both the traditional and alternative insurance markets, she added, and the public sector, which could be viewed as a potential target for terrorists, could be hit hard, she said.

"Insurers have to be very conservative in their thinking," she said. "Next it could be somebodys water supply or their airport and we hear that the airport [insurance] market is contracting."

As a result, she said, risk managers could be "scrambling for coverage. There will be people going out of business because of the costs that have been rendered due to the terrorist acts."

Ms. Carson predicted that the areas affected most will be the property and workers compensation markets as well as life insurance. "Its hard to know how all this will be absorbed into the public realm," she said.

How will public entities make up for the monetary losses they most likely will be seeing? "One way to recoup costs is to look for a raise in taxes, or a reduction in other services," Ms. Carson said.

And what are the areas most likely to be affected? "Education and travel," she explained. "So now youve hurt the travel industry."

Ms. Carson predicted an early 1980s-style back-to-the-future resurgence in claims-made coverage. She warned that insurers "will find that they can sell it at almost the same price but it doesnt have the tail coverage and so its something that I would be cautious of." But she added that "it could be a last resort during a time of contraction."

In the long run, claims-made policies are "never less expensive," she added. "Here we are again in a contracting market and history will probably repeat itself."

Ms. Carson noted that a direct effect of the hardening market is the added time and effort now required to supply information requested by insurers.

"Were trying very hard as a customer to provide really good information, but whats good to us is not enough, and the underwriters are asking for more," she explained. "Were trying to provide what we think is excellent underwriting information ahead of the curve, and theyre coming back and saying not enough."

Insurers are requesting more detailed financial information, she said. Where an organizations annual reports were once enough, now they are required to extract and organize the information within the reports, she said.

"Its way too much work. Its like, cant you see that were very solvent and growing?" she asked.

She said insurance companies also are requiring more loss information. Where three-to-five years was once the norm, "they want to go back seven," she said. "The attitude is, what are you hiding from us?"

She added that "I look at my risk and say, Im a mid-sized municipality outside of Denver, Colo. This is a great risk and youre putting us through these paces? It comes off like they really dont want to do this. You wonder what they would do if it was a really tough risk like New York City or Los Angeles."

As a result of new requirements for detailed information, Ms. Carson said that a part-time employee now works full-time to update the citys property schedule, "which we have really scrubbed to make sure we have everything up-to-date," she said. "Im trying to be truthful and fair and shes working hard taking pictures of every single facility and updating information to get it in perfect condition."

Carl Modecki, president of the Captive Insurance Companies Association and principal of Carl A. Modecki Consulting Services in Tallahassee, Fla., sees immediate and profound effects from the terrorist attacks.

"As a result of talking to at least one delegate here, [companies] are invoking clauses and saying that in seven days from now your coverage is going to drop $50 million and on and on," said Mr. Modecki, speaking from a captive conference in Guernsey.

Most contracts, he explained, contain clauses with "certain outs, and it may not necessarily be a war clause."

Mr. Modecki predicted that, "I think youre going to see captives much more in the mix of considerations of corporations. I would expect that there are going to be a lot of inquiries to a lot of people about what is a captive and why should I consider a captive? and people are going to seriously look at who theyre doing business with in terms of their financial strength."

He explained that owning a captive insurance company could become a necessity for some organizations, but that they might have difficulty both in finding a front as well as reinsurance. On the latter, he said, "the issue there is that there will be enough capacity, but can these companies continue to stay in business?"

He cited recent reports that "this is a huge blow to all but the strongest insurance carriers." (See accompanying story for more on the impact on captives.)

Ms. Carson said that the City of Longmont is self-insured, but that owning a captive is not something she would consider. At one time she was involved with a captive, but found them to be "very regulated and very expensive. You have to do a lot of filings and suddenly you, as a much smaller entity, have to be able to fund your losses at a much higher level because of regulation," she said.

She continued that reporting information required of captives demands additional staff, pooling risks and sharing databases, "things you dont have to do when youre self-insured or carrying some kind of a self-insured retention," she said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 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.

Contact Webmaster