September 11, 2001: Its Impact on the Insurance Industry - PowerPoint PPT Presentation

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September 11, 2001: Its Impact on the Insurance Industry

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  1. September 11, 2001:Its Impact on the Insurance Industry

  2. Outline Insurance Coverage for the World Trade Center The Impact of the Loss on the Insurance Industry Excluding Terrorism Federal Role Coverage for Terrorist Acts Future Developments

  3. Property Insurance on theWorld Trade Center • Cause of Loss • Aircraft • Explosion • Fire • Type of loss • Direct • Real property • Personal property • Consequential • Loss of income • Potential Exclusion • Act of War

  4. Other Covered Losses in World Trade Center • Life • Health • Disability • Workers Compensation • Liability

  5. World Trade Center Losses Current Estimate $50-55 billion Property – Towers 1 and 2 3.5 Other 5.0 Business Interruption 10.0 Workers Compensation 3.5 Aviation 0.5 Event Cancellation 2.0 Liability – Airlines 3.5 Other 20.0 Life 4.0

  6. The Effect of the WTC Loss • Primary insurers will pay approximately 1/3 of the WTC losses • Reinsurers will pay approximately 2/3 of the loss • The insurance industry can afford to pay for the WTC loss • The industry cannot afford to cover another loss of this magnitude in the near future • When capital levels are replenished, the industry would be able to withstand another major loss

  7. Excluding Coverage for Terrorist Acts • Reinsurers are now excluding terrorism coverage • Many reinsurance contracts renewed 1/1/02 • These contracts do not provide coverage for terrorism • Primary insurers filed for terrorism exclusions • 45 states (as of 2/22/02) allow terrorism exclusions • Primary insurers are beginning to exclude terrorism as policies renewed • In states that do not permit an exclusion, commercial property coverage will be difficult to obtain

  8. Factors Affecting Exclusion • Workers Compensation • No exclusions for a particular event allowed • Standard fire policy language • Laws in 30 states require use of standard fire policy • Covers all fire losses, regardless of cause

  9. Coverage for Another Terrorist Act • If the loss occurred now, or in the near future, primary insurers would bear most of the cost • Solvency concerns • If the loss occurs after insurers have added the exclusion, the individuals and businesses would bear most of the cost

  10. Examples of Problems Caused by Lack of Terrorism Coverage • Property owners without adequate coverage • Particular problem for “trophy” properties • Cost increases for property coverage • Double the cost for 1/5th of the coverage • Lenders requirements for insurance coverage • Many borrowers are in violation of loan covenants • Financing for new construction projects is being withheld

  11. Federal Role in Terrorism Coverage Terrorism Risk Protection Act (H.R. 3210) • Provided for a loan program for insurers • 90% of losses over $1 billion • If losses exceed $20 billion, premium surcharge • Tort reform provisions • Ban on punitive damages (other than perpetrators) • Limits on noneconomic damages • Sunset provision 2002 (could be extended to 2004) • Passed the House of Representatives on 11/29/02 • Not passed by the Senate

  12. Alternative Federal Proposals • Federal government as a co-insurer • Retention of $10 billion • Government would pay 90% of losses over retention

  13. Coverage for Terrorism • A few companies are selling specialized terrorism coverage • High deductibles • Low limits • High premiums

  14. Future Developments • Insurers are concerned over concentration of risk in Workers Compensation • Large premium increases are impacting companies of all types • Construction work is slowing down • Lack of terrorism coverage by itself could cause serious economic problems • Risk sharing for terrorism losses will develop