Another Attack Could Wipe Out Surplus
California Correspondent
San Francisco
Another devastating terrorist attack on America could wipe out upwards of 50 percent of the industrys surplus and "would cause severe strain for future reinsurance underwriting," the chairman of the Reinsurance Association of America warned here.
"Im concerned that if we have another event of that size or multiple terrorist events, it would leave the reinsurance industry in a precarious position," said James F. Duffy, chairman and chief executive officer of St. Paul Re in New York.
Mr. Duffy delivered his sobering observations during his appearance at the National Insurance Leadership Symposium, presented by the Council of Insurance Agents and Brokers, the RAA, and the American Insurance Association.
"The industry is not in a solid position to withstand another attack of [Sept. 11's] magnitude. Many observers believe that the industry overall was underreserved, even before 9/11," Mr. Duffy told National Underwriter.
"If nothing else happens, the industry will be all right, particularly with hardening market conditions fueling that recovery," he said.
However, he added that "the uncertainty about possible future terrorist attacks is a concern for both reinsurers and their cedants."
Noting that the Sept. 11 tragedy is expected to cost the insurance industry as much as $40 billion to $50 billion–the largest covered catastrophic event in insurance history–he said, "theres no telling what the effects would be if another terrorist attack takes place."
"Weve all been hearing reports about the possibility of another such event and the fear that it could be far worse than 9/11."
While conceding that another terrorist attack "would have severe implications," Lloyds of London CEO Nicholas E.T. Prettejohn declined to be more specific when questioned after the meeting. However, after acknowledging that Lloyds sustained a 9/11-related loss of about $2.7 billion, he said, "its manageable in our unique financial structure. Were going to boost reserves by $400 million and reduce [the sizes of lines]."
Mr. Duffy and other speakers hammered home on the dual theme of the importance of carriers "returning to basics" and exercising "underwriting discipline."
Mr. Duffy predicted that "youll see sustained pricing discipline and a back-to-basics approach." He said carriers would adopt a "sharpening definition of risk appetite."
Sound underwriting practices involve "evaluating risk appropriately and getting the right price. Rates have to increase with loss trends," said Mr. Duffy.
Nicholas Spaeth, senior vice president and general counsel of Employers Reinsurance Corp. in Overland Park, Kan., agreed that "we need to focus on underwriting and look at how we underwriteselection of risk, terms and conditions Its important to give a lot of attention to that."
However, the call by industry leaders for a return to "underwriting discipline" leaves primary workers' compensation carriers on the spot, because they cannot exclude one of the biggest catastrophe risks they faceterrorism, insurance officials here lamented.
Although New York and California are among a handful of states in which insurance regulators have not approved the Insurance Services Offices broad exclusion of terrorism exposures in property and other commercial lines policy forms, nowhere do workers' comp insurers have that option, industry executives here noted.
That poses a "conundrum" for workers' comp carriers, a number of speakers here agreed. Indeed, two Southern California insurance executives were among those who didnt entirely buy into the practicality of the mantra of "underwriting discipline" when it comes to workers' comp.
"Sure, its important to exercise underwriting discipline, but workers comp insurers cant exclude terrorism exposures. Yes, its a conundrum," said Russ John, president of Swiss Re Underwriters Agency in Calabasas, Calif.
Treaty reinsurance writers "are leaving us in a tough bind" by excluding terrorism coverage, added John Keenan, CEO of Keenan & Associates, a broker in Torrance, Calif. "Our accounts include a number of hospitals, and they have a high concentration of risk. Its a good idea to spread exposure, but you dont necessarily get that with hospitals."
Primary writers indeed face "a conundrum" with workers comp in particular, agreed Alaska Director of Insurance Bob Lohr, who didnt attend the conference, but who in a followup telephone interview said he recognizes the predicament of primary carriers.
"I understand workers comp writers do face a conundrum in the sense that many treaty reinsurers have excluded terrorism exposures from their treaty reinsurance contracts," Mr. Lohr told the National Underwriter.
"That may leave primary writers in a difficult situation. One of the possible answers for excess workers comp insurers is to establish higher self-insured retentions."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 18, 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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