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Insurance industry could face record losses

Industry experts say the attacks will cost more than $10-billion - and maybe double that.

By JEFF HARRINGTON

© St. Petersburg Times,
published September 13, 2001


With the emotional toll of the terrorist attacks still sinking in, America on Wednesday began to assess the financial toll of the largest man-made disaster the insurance industry has ever faced.

Industry experts calculate the price tag for the attacks at more than $10-billion and some fear it could well exceed $20-billion. If damages surpass $15.5-billion, it would overtake 1992's Hurricane Andrew as the costliest insured disaster of any kind.

Broker CB Richard Ellis valued the World Trade Center at $1.2-billion though property losses from the attack will probably far exceed that amount when damage to neighboring buildings is added.

"It's got to be huge when you consider all the property damage and business interruption and all the collateral damage, and we still know nothing about how many people are dead and life insurance costs," said Joseph Belth, editor of the "Insurance Forum", an industry newsletter based in Indiana.

As many as 100 insurers may ultimately share the cost, which may not be determined for weeks. Bearing much of the exposure will be reinsurers such as Berkshire Hathaway Inc., Swiss Re, Munich Reinsurance Co. and Lloyd's of London. Reinsurers offer extra layers of coverage to insurance companies.

Swiss Re compared the event losses with the 1999 European winter storms, which cost insurers overall about $6.7-billion. But it acknowledged the U.S. attacks were unique. "Given its unprecedented nature and complexity, it will take some time to provide accurate information about the full extent of this event," the company said in a statement.

In Florida, residents and businesses can expect a trickle-down effect as reinsurers pass on some of their costs to insurance companies which, in turn, make up the money by charging higher premiums. Representatives of Florida insurers said the attacks put pressure on already rising reinsurance costs but they downplayed the ultimate effect on rates.

"Clearly there may be some increase in reinsurance costs everywhere because of this but we're not expecting them right now to be dramatic or immediate in Florida," said Sam Miller of the Florida Insurance Council.

He noted that after other multibillion-dollar disasters outside Florida, such as the Northridge earthquake and Hurricane Hugo, there was minimal impact on Florida's insurance market.

Miller contrasted the situation to Hurricane Andrew, which led to the collapse of several insurers in Florida, the exodus of others, and a dramatic spike in homeowners insurance that continues to haunt the market.

"This is different," he said. "It's commercial insurance; it's workman's comp. These are different players and the risk is spread all over the world."

Bob Hartwig, chief economist with the Insurance Information Institute, a trade group based in New York City, said Floridians should feel virtually no impact in the two areas they would notice most: homeowners insurance and auto insurance.

"This is roughly equivalent to the impact of a major hurricane. 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," added Marty Weiss, chairman of Palm Beach-based insurance rating company Weiss Ratings.

Tom Hagerty, Florida spokesman for State Farm, the biggest insurer in Florida, was likewise doubtful there would be much effect on Florida homeowners or businesses.

One likely exception, Miller said, are theme parks such as Disney World, landmarks or skyscrapers that may now be viewed as terrorist targets. "Before, an underwriter looking at (risk of exposure) would put terrorist attack way at the bottom" after fires, floods and other natural catastrophes, he said. "Now all of a sudden this is going to be way up there."

Still unclear is how much insurers of the Trade Center will get off the hook because of the nature of the disaster.

Insurance policies typically exclude covering damage caused by acts of war, but that is generally defined as a declared war between nations. With increased risks of global terrorism, some commercial insurance policies may have inserted exclusions for damage caused by terrorist attacks.

By midday Wednesday, some estimates put damages at more than $40-billion. But Hartwig of the Insurance Information Institute cautioned that the tally of economic losses could vary widely from what is insured. Hurricane Floyd, for instance, caused $7-billion in damage but only $2-billion of the losses were insured.

Regardless of the final tab for insurers, Hartwig said the attacks dwarf any previous man-made catastrophe in the country.

The 1993 World Trade Center bombing caused $510-million in insured losses. The 1995 Oklahoma City bombing resulted in insured losses of $125-million. The Los Angeles riots of 1992, until now the most costly man-made disaster, led to insured losses of $775-million.

To calculate the effect of the attacks, insurance adjusters will have to include the destruction of the trade center towers, damage to business and personal property of tenants and employees, workers compensation for perhaps thousands of injured workers, claims for lost business income, and the cost of creating temporary off-site locations.

Added to the tally is the loss of four hijacked planes carrying a combined 266 passengers and crew, a devastating and unparalleled blow to aviation insurers.

Since the U.S. government is self-insured, the damage to the Pentagon building won't affect commercial insurers. But commercial businesses that were located in the damaged area of the Pentagon could add to the claims.

-- Information from Times wires was used in this report. Jeff Harrington can be reached at

harrington@sptimes.com or (813) 226-3407.

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