Myths Haunt Insurers After 9/11 Losses
New York
The many myths that have sprung up about the insurance industrys ability to handle claims stemming from the Sept. 11 collapse of the World Trade Center have to be dispelled, cautioned Robert Hartwig, chief economist and vice president of the Insurance Information Institute in New York.
Very shortly after the terrorist attacks on the United States, insurance regulators and others went to great lengths to assure legislators and the public that the insurance industry was well-capitalized to pay the resulting claims, Mr. Hartwig noted in a speech here during the annual meeting of the American Institute of Marine Underwriters.
However, Mr. Hartwig also observed that many misleading numbers have been and continue to be thrown around by people who lack a real understanding of the industry's finances.
As an example of one such "capital myth" being circulated, he cited one source as asserting that the insurance industry has $4 trillion in assets to pay WTC-related claims.
In reality, according to Mr. Hartwig, "by the end of last year, insurers had about $317 billion in claims-paying capacity–in other words, policyholder surplus." That number had dropped to $298.2 billion as of June 30, he added.
It would even be a myth to assert that the p-c industry's entire policyholder surplus is available to pay the terrorist losses of today and the future, Mr. Hartwig observed.
Indeed, he estimated that only about $100 billion is available today for claims against "target commercial lines," referring to lines of insurance sensitive to terrorist attacks, such as commercial property, liability, aviation and workers compensation.
But Mr. Hartwig also suggested that reserves available to pay claims might be even smaller today because of reserve-shrinking trends that began well before the terrorism attacks.
"Outside of Sept. 11, up to the first half of this year, the industry's surplus had been declining for a variety of other reasons," he said. "In fact, it had declined from $317 billion at the end of last year to $298.2 billion as of June 30 without the terrorist attack," he continued, attributing the decline to "the ordinary, run-of-the-mill [claims] and poor investment results."
In fact, he reported that "this year we were on our way to one of the most disastrous years for profitability ever without Sept. 11."
Next, Mr. Hartwig addressed pricing. He said that before Sept. 11, the p-c industry was in the midst of a hard market and that this past spring and summer rates had been rising "in the 10-to-15 percent range."
He added that "this was a long time in the making" due to "grossly inadequate" pricing during the latter half of the 1990s.
Reinsurance prices also were on the rise even before Sept. 11, he observed. Much of this "was showing up in revenue growth" of reinsurers, "so for the first time in 14 years it seemed as if we had a bona fide hard market," Mr. Hartwig said.
He also believes that "premium growth this year, not even including what would happen as a result of 9/11, will be the highest since 1987."
Mr. Hartwig cited several reasons why analysts think that the insurance/reinsurance market will remain hard:
The total capital raised, committed or "supposed to be raised" recently is "substantially less–maybe half of what the capital markets lost in 9/11."
"Capacity loss is greater than the dollar loss" because insurers and reinsurers will be more cautious as a result of terrorism exposures. Mr. Hartwig said that this means that insurers and reinsurers will "want to hold more capital surplus aside for every dollar of risk they assume now because the world is riskier than it once was."
There are still some "reserve shortfalls" in the p-c industry, he noted. "Asbestos didnt go away, workers compensation insurance deficiencies didnt go away," Mr. Hartwig observed.
Poor investment results still abound, and interest rates keep declining.
In short, "were in a long, downward slide in terms of aggregate profits," according to Mr. Hartwig.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 26, 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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