Risk Management

Is There an Insurance Crisis Coming?

Premiums are going up, coverage is going down, and now S&P says some insurers may scrap workers' comp policies.
Stephen TaubJanuary 10, 2001

Looks like insurers weren’t bluffing.

Shortly after the September 11 attacks, representatives of the property and casualty insurance industry asked Congress to cap losses by promising to pick up terrorist-related claims above a specified level. At first, it looked like legislators were going to deliver.

But Congress adjourned for the holidays without passing an insurance bill. At the time, executives at insurance companies warned that the lack of government help would force them to deep six policies that covered terrorist acts. Some members of the media claimed insurers were issuing those statements as negotiating ploys.

Apparently, they were serious. On Wednesday, rating agency Standard & Poor’s said several commercial insurers will nix coverage for losses caused by acts of terror, allowing 2001 policies to go un-renewed for 2002. S&P also warned that the withdrawal of coverage will spread beyond property and aviation insurance to other risks, such as workers’ compensation coverage.

What’s more, insurers still may not write policies covering terrorist acts even if Congress does pass a bill capping losses, says the rating agency. “Many insurers will not want to provide significant coverage for terror losses regardless of government action,” says Don Watson, a managing director with Standard & Poor’s insurance ratings group. “By their nature, terror losses are difficult to price, and the potential concentration within an insurer’s portfolio are such that it would be imprudent for insurers to write coverage without effective reinsurance.”

Watson claims most reinsurers are not willing to provide large policy limits, much less uncapped coverage for terror risk. “So some are thinking it’s better just to opt out of terrorism coverage altogether,” he notes.

Of course, the federal government isn’t the only game in town. States can also assume the role of insurer of last resort. And in fact, all but three have already provided some relief from terror exposure to insurers. In New York, California, and Connecticut, however, insurance commissioners have not followed the National Association of Insurance Commissioners’ recommendation to allow some exclusions on terror cover. As analysts at S&P point out: “The concern for insurers writing property/casualty coverage is that these states could mandate insurers operating in their jurisdiction to cover acts of terrorism potentially resulting in unacceptable accumulations of risk for insurers.”

Until Congress passes a bill–or state regulators require coverage– S&P says more risk will be shifted to the corporate, industrial, and real estate markets. Obviously, if insurers won’t cover terrorist acts to property, corporates will have to do the covering themselves. Indeed, many industry analysts say businesses will have no choice in 2002 but to do more self insuring, either by agreeing to higher policy deductibles or setting aside reserves to cover losses.

This raises a worrisome question: will the exposure to more risk affect the credit ratings of companies? “The ratings implications for corporates are likely to be very limited and selective,” asserts Sol Samson, a managing director with Standard & Poor’s corporate ratings group. “…The impact would be material only in situations where the perceived specific risk of a terrorist incident was high–just as lack of earthquake insurance isn’t a problem in regions that don’t face much risk of such natural events.”

In addition, companies may not be hurt as much if they operate a lot of plants and facilities. While owning more facilities may increase the chance of a terrorist attack, experts say it lessens the impact such an act would have on a company’s overall operations. They also point out that insurance doesn’t solve every problem. “If cruise ships were perceived as targets, who would take cruises? If a landmark building were viewed as vulnerable to terrorist attacks, what rents could it command?” asks Samson. “Insurance cover for the boat or building wouldn’t resolve the risk exposure.”

Not exactly a comforting thought for companies with large office buildings. Indeed, 9/11 has brutally demonstrated the risk of having large numbers of employees working in one location. Industry watchers say terror attacks on big corporate sites could easily bankrupt insurers with workers’ compensation claims averaging $1 million or more. At the same time, reinsurance capacity for high excess workers’ compensation remains in short supply. The combination has some insurers rethinking the whole notion of worker’s comp coverage. Notes an analyst at S&P: “Many insurers may elect to cut workers’ compensation coverage with large accounts rather than assume terror risks implicitly.”

None of this is particularly good news for risk managers and CFOs. For a more in-depth look at the looming crisis in corporate insurance, read “Insurance at Risk,” available on CFO.com on Jan. 16.