© lloyds.com Limited 2001

U.S. attacks: Insurers count the cost

Bermudian, European and U.S. insurers are issuing initial estimates of claims, but it could take months to assess the final human and financial cost of the biggest terrorist act in history.

Friday, 14 September 2001 - The impact of the terrorist attack on the World Trade Center may have a modest impact on the property insurance industry, according to early analysis. But insurers with workers' compensation or business interruption exposure are most exposed since there is no limit to the amount of claims they could incur, says independent insurance ratings firm Weiss Ratings.

"In terms of property damage, this is roughly equivalent to the impact of a major hurricane," says chairman Martin D. Weiss as Bermuda's insurers report limited exposure to the incident, while Europe and the U.S. brace themselves for a bigger share of claims. "It is a blow to property insurers, but it is something they are generally prepared to absorb so we are unlikely to see a rash of failures."

Standard & Poor's (S&P) says direct financial losses will probably exceed the largest insured losses ever yet seen. Steve Dreyer, managing director for U.S. Insurance Industry Ratings at S&P, says the insurance industry is strongly capitalised and a big financial hit will not threaten the stability of the system overall.

"While we cannot yet endorse a specific estimate, companies so far have acknowledged about US$4bn in losses, a figure which will likely go much higher. Once insurable losses exceed US$10bn or US$15bn, we would expect to see a significant impact on balance sheets of individual insurers," Dreyer says. But he adds that the totals would have to exceed US$50bn before arousing concern about the insurance system.

Many property and casualty insurance policies include standard language that excludes damage caused by war or acts of war and standard policies do not exclude acts of terrorism - although it remains unclear which category the attack falls into. Insurers will also face claims under life, aviation and business interruption policies.

Calculating the cost

Lloyd's has announced its net exposure to the attack totals £1.3bn (US$1.9bn), or 12 per cent of the market's 2001 capacity. It stresses that this figure has not exhausted the Central Fund, which contains £330m. Lloyd's also points out that the World Trade Center claims will not all be made at once; they will take several years and will affect its finances over four years.

Scor says it faces costs of between US$150 and US$200m, net of retrocession cover and protections. Munich Re, Berkshire Hathaway and Swiss Re are also among those that have a big exposure. Swiss Re has announced that it expects to cover CHF2bn (US$1.25bn) in losses. "Based on a first and very rough estimation, the loss to Swiss Re from this event is expected to be in the range of the 1999 European and winter storms, Lothar and Martin," says a company statement.

A revised estimate from Allianz shows the total extent of damages resulting from the attacks will reach a net loss of up to E1bn (US$930m) for the group. This affects current forecasts on its annual results considerably. Allianz lowered its forecast for 2001 net profit to about E1.7bn from just over E2bn. Last year the figure was E2.4bn.

Munich Re says claims will be "considerable" but would not threaten its financial stability. The reinsurer estimates that its losses could reach E2.1bn - its largest in history. These will come mainly from aviation, buildings, business interruption, life and workers' compensation cover.

Reinsurance is expected to limit Chubb's pre-tax loss to the range of US$100m to US$200m, subject to revision as more facts become known. However, the tentative nature of these estimates was summarised by AIG's chairman Maurice Greenberg, who comments:

"It is impossible for any company to precisely estimate total losses at this time. Although AIG's property insurance coverages on the World Trade Center complex are minor, as the world's largest commercial insurer, we expect to receive claims from many insureds across a wide range of coverages."

The aftermath: Key people

Insurers have also been physically affected by this disaster. Allstate, Aon, Marsh, Scor, Guy Carpenter, AIG, and Allianz's Fireman's Fund had offices in the twin towers. Almost 300 Allianz employees were in the World Trade Center or neighbouring buildings. Allianz says all of them are safe.

Financial services companies may take a close look at the distribution of key employees as a consequence of the attack. According to mi2g, the trend of putting all bank staff under one roof and placing their buildings next to each other has inherent security exposures.

As such, the use of electronic management systems may increase, including the recording of all communication such as email, telephone and face-to-face discussions, says mi2g.

The attack on the World Trade Center and the Pentagon has had a massive impact on the world's financial centres. They are learning from an unwelcome and unexpected lesson in systemic risk management in terms of how much of New York's business can be picked up elsewhere, and how fast in response to a massive catastrophe on the other side of the world.

A briefing from e-risk management specialist mi2g in London says 10 financial services companies have been severely affected by the attacks on the World Trade Center, apart from the New York Stock Exchange. They include Morgan Stanley, Fiduciary Trust, Fuji Bank, Dai-Ichi Kangyo Trust and Kemper Insurance.

It points out that most banks and insurers have routine batch back-ups for all their key data, and trading floors have a regular back-up every hour or per transaction. The back-up data has to survive and this is only possible if the back-up data centre is either in a remote location, or is bomb-proof, says mi2g.

The loss of financial transactions will be related to the depth of the back-up system and whether that back-up is available or was destroyed with the twin towers.

The worldwide insurance industry will be sorely tested by this terrible event. But, the emotional and economic impact of the disaster will continue long after claims have been met.

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The views expressed in this article are not those of Lloyd's of London.