Risk Management

Come January, Expect Premium Premiums

Terrorist attacks will likely drive up the costs of corporate insurance policies.
John GoffSeptember 19, 2001

Last week the National Association of Insurance Commissioners estimated that insurance companies and reinsurers will have to pay out about $10 billion in claims stemming from the recent terrorist attacks on New York and Washington, D.C.

$10 billion is not exactly pocket change. It may not exactly be accurate, either. According to a statement released late Tuesday by Moody’s Investors Service, the insurance bill for the terrorist strikes could be much higher than first thought. While the ratings agency did not offer a specific figure, a Moody’s analyst did note that “many of these initial estimates will prove to be insufficient, perhaps by a substantial amount.”

Some industry executives speculate the total could surpass $30 billion — a record amount for a single catastrophe. The previous high was $19 billion for Hurricane Andrew in 1992.

Such a bill would be bad news for big commercial insurers like AIG and Chubb. Moody’s noted that insurance companies generally track losses on a net basis — based on the assumption that all applicable reinsurance will be collected. But in the case of last week’s attacks, disputes may arise between insurers and reinsurers about the extent of coverage. “It is also possible that some reinsurers will be unable to honor all their claims, leaving primary insurers to shoulder a heavier load,” Moody’s stated.

That’s bad news for corporate risk managers as well. According to the report, last week’s bombings will likely lead to the acceleration of price increases already underway in commercial and reinsurance policies. The bigger the insurance bill from the events of September 11, the bigger the pass-along to corporate customers. Risk managers can expect to see a substantial jump in rates in January, when reinsurers typically reprice their contracts. In addition, some insurance companies will likely exclude acts of terrorism from future commercial contracts.