Industry Still Strong, But Prices Soar

Beyond the question of how much the damage bill for the p-cinsurance industry would be, there were several potential effectsthat became the subject of questions just after last Sept. 11.

Will attack-related losses cause a rash of insolvencies anddowngrades?

How much will prices rise?

Will there be a swift movement of commercial insurance buyersout of the market toward self-insurance?

These were the early answers:

The possibility of downgrades and insolvencies appeared high,with many companies being put on watch by various ratingagencies.

Prices will rise “a lot.”

With a heightened awareness of risk, buyers will stick with theinsurance mechanism in spite of rising costs.

A year later, only the second prediction turns out to be ontarget.

Robert Hartwig, senior vice president and chief economist forthe Insurance Information Institute in New York, said theinsolvency of Japans Taisei, a member of the North Carolina-basedFortress Re aviation pool, is the only failure that can be directlylinked to Sept. 11, adding that the unrelated Nov. 12, 2001, crashof American Airlines Flight 587 further “was the straw that brokethe camels back” for the company.

Explaining why there were not morebankruptcies from Sept. 11, he said: “It was a testimony to how theglobal insurance market spreads risk efficientlyfor a type of riskthat hadnt even been anticipated before. That was made possible bythe widespread use of reinsurance.”

While the risk was spread among 119 different companies, by Mr.Hartwigs count, “for the most part, it was the larger companieshaving the larger loss,” he said.

“If we go back two years, the industry was alleged to be grosslyovercapitalized,” added John Kollar, vice president of consultingand research for the Insurance Services Office in Jersey City,referring to the general health of the industry before Sept.11.

Unlike insolvencies, rating downgrades have been common in thelast 18 months, according to James Auden, senior director at Fitchin Chicago. “Weve had a lot. But some were probably coming” wellbefore Sept. 11, he said. He noted that Fitch did an industryreserve study last summer, which wrapped up right after Sept. 11,leading to a number of downgrades “attributable to a poor market inthe late '90s and 2000–underpricing and underreserving.”

“Some companies may have been on the bubble, and 9/11 led tofurther downgrades,” he said. There was another round of downgradeswhen insurers released fourth-quarter results, he noted. “We saw alarge number of charges. Some were 9/11 revisions. But others werefor discontinued operations, reserve adjustments, and restructuringcharges. There was a lot going on.”

Keeping down the number of downgrades, “we looked at howcompanies responded to the loss in terms of replenishing capital.That was a big part of the exercise,” he said, noting that somecompanies with sizable losses demonstrated an ability to refilltheir coffers.

Responding to the pricing question–specifically, what portion ofrate hikes can be attributed to Sept. 11–most analysts said it wasunanswerable. “I dont think the people making those decisions couldexactly say,” Mr. Kollar said. “There was so much stagnation inpricing for so many years that the pent-up demand for priceincreases was there.”

Mr. Hartwig, however, shared some numbers. Pre-Sept. 11,commercial property and liability was rising in the 10-to-15percent range, and workers' comp close to 13-to-15 percent. Today,commercial property and liability are rising about 30 percent, withworkers comp hikes of 20-to-25 percent.

“What you can say is roughly half of the 30 percent increaseseen on average on commercial property is directly a consequence ofthe post-9/11 environment,” Mr. Hartwig added, indicating that theline is “clearly on a higher risk plateau” as a result of theevent. “In comp, you can argue that maybe a third of it is.”

Noting that “there is evidence of more interest inself-insurance and the formation of captives,” he called the trenda “rational economic response to higher prices.” However, he addedthat “the danger of this is that any insureds think by joining apool or self-insurance group, they are going to wind up somehow ininsurance heaven.” He warned that when a widget-maker self-insures,it enters a new business–”one that its not very experienced in[and] could be very costly, if you dont understand the risks,”according to Mr. Hartwig.

Mr. Auden said insureds are taking more risk, even if theyre notgoing bare, by taking higher deductibles and because insurers areoffering lower limits.

“It was such a surprise–the event, and then the market reaction.Maybe thats the next step,” he said, referring to self-insurance.“Im not sure whats going to happen, but you can see that as kind ofthe next reflexive move in the primary market.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 9, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.