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WTC claims will be big, but not crippling

Standard & Poor’s says the terrorist attacks in the United States will in all likelihood exceed the largest insured losses ever yet seen, but they won't cripple the insurance industry.

Monday, September 17th 2001, 10:11PM

"Any attempt to quantify the financial impact of the recent terrorist actions in the U.S.must be purely speculative until more information becomes available, which may take weeks," US Insurance Industry Ratings managing director Steve Dreyer says.

"But the insurance industry is strongly capitalised and can withstand an enormous financial hit without threat to the stability of the system overall."

Current estimates are that losses of US$4 billion will be recorded, but they could well end up being more than US$15 billion.

Dreyer says the insurance industry can handle losses of that magnitude. He says totals would have to be more than US$50 billion before S&P would begin to worry about the insurance system.

Insurance losses from the latest tragedy are spread among many of the world’s largest and strongest insurers, such as Chubb (rated AAA), which has reported a maximum exposure of US$200 million for property claims, and Swiss Re (rated AAA), which has reported US$1 billion in expected claims.

The insurance coverages likely to be most affected include life, disability, workers’ compensation, health, business interruption, property, and general liability.

S&P estimate that total life insurance losses will be in the low, single-digit billions of dollars, which is not likely to cripple the industry. There also may be some delays in payments on life insurance policies as the identification process is completed.

The claims are likely to throw up a number of technical questions for insurance analysts to answer including:

  • Even if primary insurers in the US do not usually exclude terrorism from theircovers, did the reinsurance protection obtained by affected U.S. insurers exclude terrorism, as is common practice among European reinsurers?
  • Will the crashes and subsequent building collapses be considered a single event or multiple events? This is an important consideration for the industry as definition of the losses either as a catastrophic single event or as a series of separate large claims will have a major bearing on which insurers and r einsurers eventually prove liable for the losses.
  • Will the events further exacerbate the already ongoing slide in equity asset values, both generally across all markets and specifically in respect of the share values of individual insurers and reinsurers? If so, how will this affect those individual insurers and reinsurers where capitalisation already appeared aggressive, and what will be the effect on those companies that were already well-advanced with new capital raising exercises?
  • What is the impact that this tragedy will have on reinsurance pricing? Reinsurance pricing could substantially firm in the wake of this catastrophe. After Hurricane Andrew struck in 1992, the reinsurance industry enjoyed substantial pricing flexibility over the next two years as the industry benefited from the hardest reinsurance market in memory. This much-needed pricing increase will help the reinsurance industry, which is only starting to see rate improvements after several years of underpricing.

S&P has confirmed that its insurer and reinsurer financial strength ratings already incorporate allowance for near-term volatility caused by changes in the economic cycle and the periodic occurrence of major losses. Nonetheless, certain individual ratings may come under pressure in due course if claims and asset value reductions are found to compound existing weaknesses and lead to a permanent reduction in financial strength due to a seriously depleted capital base or loss of financial flexibility.

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