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Insurance Industry Solid After Terrorist Attacks

The global insurance industry is on a solid footing despite the record losses it will suffer from the terrorism attacks in the United States.

Thursday, November 1st 2001, 11:25PM

International rating agency Standard & Poor's says the industry remains on a solid footing because of the powerful backing of European and US reinsurance giants, plus it is proving a magnet for new investment.

"With capital-raising initiatives underway, we are confident the industry will not only survive, it will prosper going into 2002," S&P's director of insurance analytics Don Watson says.

"Depending on new loss activity, we should see a very profitable year in 2002, and 2003 will be well positioned for a profitable performance based on expected rate increases."

The sharing of risk across the Atlantic Ocean (US 42%, Germany 15%, UK 13%, Switzerland 11%, and Bermuda 9%) accounts for much of the tenacity insurance ratings are showing, he says.

European insurers, and particularly reinsurers, carry almost half of the current net loss estimates.

The 20 insurers and reinsurers with the greatest exposure to the World Trade Center attacks, which accounts for about 80% of total loss estimates, command almost US$300 billion in capital.

None are rated below the ‘A’ category (strong), and none has exposure large enough to threaten its solvency.

Although some additional downgrades may follow the six that have occurred since the attacks, the overwhelming majority of exposed companies are expected to maintain secure financial strength ratings.

"We’re seeing only a handful of lower ratings, though there is reduced capacity by the industry to shoulder another catastrophe," Watson says.

Following the attacks 23 insurance entities were placed on creditwatch, but Watson expects some of these to be resolved with an affirmation of the rating that existed prior to the attack, largely reflecting the successful efforts of insurers to raise capital.

The industry is also finding crucial support from investors and lenders drawn to the much firmer pricing environment and increased profitability that inevitably follow a major insurance catastrophe.

After insurers lose a significant chunk of capital, there is a retrenchment in capacity, coinciding with increased demand.

Rate increases of 100% or more on loss-exposed policies are not unusual. In January 2002, when about 60% of commercial-lines contracts come up for renewal, increases could easily average more than 20%, even while insurers reduce exposure to terrorism losses by tightening contract terms and raising deductibles.

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