Sept. 11 Exposed Insurer Modeling Flaws
Tucson, Ariz.
The Sept. 11 terrorist attacks on the United States exposed a flaw in the insurance industrys modeling process, an industry executive told a meeting of captive insurers here.
Indeed, a post-catastrophe review revealed that the industrys models for the aggregation of different types of risk "were actually inadequate," according to John Alfieri, executive vice president at Munich-American RiskPartners in Princeton, N.J.
"For the first time in our history, we had aviation risks correlating with fine arts floaters, correlating with business interruption losses, correlating with excess [workers'] comp accumulations," he said during a panel discussion here at the Captive Insurance Companies Association annual conference.
However, for individual policies, Mr. Alfieri said, underwriters had done a good job. A review of every policy exposed to the Sept. 11 attacks showed that "while we wish we would have charged a little more, we didnt really make any bad underwriting decisions."
He noted that prior to Sept. 11, the reinsurance industry was experiencing a turnaround. But, Mr. Alfieri said, the effects of Sept. 11 couldnt have come at a worse time, "because terms and conditions were the most flexible they have ever been."
In 2001, there were $12 billion in catastrophe losses, he said, noting that "by itself, without 9/11, it would have been in the top-five worst years in the insurance industry" from a catastrophe standpoint.
As for terrorism, he said that "as a reinsurer, we can exclude it overnight. From a policy-issuing standpoint, though, it takes a long time to get those exclusions approved," creating a gap in coverage for primary carriers and their clients.
After Sept. 11, "there was a significant time out because reinsurers didnt know what their capital base was to price business," he said. "Everything came to a screeching halt overnight. We were not allowed to quote business until we had some answers." Reinsurers didnt know if they could withstand another terrorist attack, he said.
Is there an increased demand for insurance as a result of Sept. 11? "Absolutely," he said, adding that the risk management profession "is under an incredibly bright spotlight right now. Every one of our clients feels it." Problems in securing fronting carriers for captives, for example, are becoming "significant as we speak," he said.
As a result of Sept. 11, about 25 percent of global reinsurance capacity is gone, he said. "Were running out of adjectives to explain whats going to happen over the next 12-to-18 months," he added. A capital infusion of around $25 billion, including new Bermuda capacity and added capital from existing players, is "not enough" to offset Sept. 11 losses, he emphasized.
"What are we telling clients? Go back to basics," Mr. Alfieri said, noting that risk managers must remember the "300-29-1″ rule. He explained that "for every major catastrophe or lost-time injury, there were 29 very small claims. For every 29 very small claims, there were 300 accidents for which there was no injury." Risk management programs, he said, must concentrate on preventing a recurrence of those 300 accidents that didnt result in a claim, as well as the 29 small incidents and one major event that did.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 11, 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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