Lloyds To Take First Insurance Strike

In terms of the underwriting focus, S&P expects Lloyd's to take a very short-term risk-by-risk approach–"and we would expect high prices," said Mr. Dreyer, who co-authored the new report on the war's impact.

"The demand for war risk coverage is surging right now," said Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York.

In recent days, oil tankers and cargo ships operators have been notified that war risk coverage for aviation and marine interests operating in the Middle East would be cancelled with a two-day notice as the military conflict starts, he said. The coverages are usually reinstated, but, predictably, at higher prices, Mr. Hartwig said.

One of the top considerations for the rate increase is how close to the war zone insured oil tankers and cargo ships would get, market participants say.

Marcus Baker, managing director for marine and energy division at Marsh in London, said rates would go up higher as these ships go further up the Persian Gulf and nearer to Iraq.

"At the top of the Persian Gulf, there would be much higher rates. The closer you get to Iraq, the more you would have to pay," Mr. Baker said.

While Mr. Baker mentioned a jump of 15-to-20 percent for war premiums for marine interests operating in the Middle East, Martin Reith, chief executive officer of London-based Ascot, which manages a Lloyd's syndicate, cited an increase of up to 100 percent for some insureds.

"Certainly, Lloyd's is the focal point for providing the war risk coverage. As of this moment, if you wish to travel to the northern Persian Gulf, the rates are really on an application basis. You will need to tell us where you are going, why you are going there, and how long you will be there for," Mr. Reith said.

"Typically, in the Persian Gulf, there is a 50-to-100 percent increase for the war premium, even just for one voyage."

But Mr. Baker added that cancellation notices and rate hikes during times of war is nothing out of the ordinary.

"Absolutely, there is nothing unusual at all. It is totally in line with what generally happens during times of war. At Lloyd's, there is a war committee that reviews the situation pretty regularly," he said.

The war can also provide extra opportunities for Lloyd's, which is also the biggest market for the war risk coverage on land. For instance, John Eltham, director at Miller Insurance Services, a major insurance broker in London, told National Underwriter that his firm had received, within hours of the first U.S. strike in Baghdad, instructions to bind a war risk in Iraq for a western company that has operations in that region. "It covers physical damage, business interruptions and abandonment if your company has to leave all the belongings in the territory," Mr. Eltham said.

Another war risk coverage is for personal accidents, he added. "That covers individuals against theft caused by war– and there are already some claims coming into the market," he said.

But in general, I.I.I.s Mr. Hartwig said there is an agreement among insurers that the war against Iraq is bad for the overall insurance industry, noting that the current military action creates the potential for enormous losses from possible retaliatory terror attacks and an uncertain investment environment.

The price of terrorism coverage will rise even if the war ends quickly because the possibility of further terrorism will linger, said Mr. Hartwig.

The geo-political uncertainty associated with the military action will have a detrimental impact on the investment environment worldwide, which could further hurt insurers' ability to offset underwriting losses with their investment profits, he said.

On the other hand, if the war ends quickly and successfully, clearing away the uncertainties, insurers could see an uptick in the investment market, as has been seen in the days leading up to the war.

Regarding ratings on general commercial insurers, S&P doesn't yet see any major impact from the war, according to Mr. Dreyer. But ultimately, "we would be concerned about the war's impact on various economies, what it does to the demand for insurance generally, and, importantly, what the war does to the investment performance of the industry," he said.

In the end, Mr. Hartwig said, insurers are all sharing the pain of the war. "The war jitters have slowed the global economy, and when the business investment picks up again after the war, insurers will benefit again," he said.

Mr. Dreyer also noted that some insurers have already commented on potential opportunities in terms of the rebuilding phase in Iraq, "which is looking way ahead, I realize," he said. But there would be potential for insurers to provide coverage for such rebuilding efforts, "which would also depend on to what extent the rebuilding would be led by the United States and the Western coalitions," he said.

Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 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.