BEHIND THE SCENES
It was the evening of September 11, 2001. Senior executives of Marsh USA, the world's largest insurance brokerage, were still trying to account for the 1,900 employees that worked in the World Trade Center. In a fax to Marsh's Chairman and CEO, from the head of one of its subsidiaries letting him know that the subsidiary's employees were all safe, the subsidiary head also broached the subject of forming a new unit to underwrite corporate coverage for terrorism. He wanted to start "thinking about . . . the opportunities in front of [Marsh]."
He was, of course, talking to the right person. The Marsh CEO was the same Jeffrey Greenberg who, as a vice president of American International Group, wrote a memo shortly after Hurricane Andrew devastated Florida in 1992 calling the hurricane "an opportunity to get price increases now." [See, Analysis & Comment, Vol. V, No. 4 - November 1992.] As was the case nine years ago, opportunistic insurers and producers are looking to leverage a disaster into higher prices and commissions.
This is not to say that there aren't some legitimate concerns with the potential cost of future acts of terrorism. The combined total of insured property damage, business interruption, general liability and workers' compensation losses arising out of the World Trade Center attacks is estimated at somewhere between $40 billion and $70 billion. While this is probably within the capacity of the insurance industry to handle, there are only so many losses of this magnitude that it could sustain. So, the industry is taking a two-pronged approach to the problem.
First, it was pretty clear at the outset that typical war risk exclusions would not preclude coverage for losses incurred as a result of September 11, so terrorism exclusions are being developed. One such exclusion we saw recently defined terrorism broadly to mean "an act, including but not limited to the use of force or violence and/or the threat thereof," by an individual or group acting alone or on behalf any organization or government, "for political, religious, ideological or similar purposes" to influence a government or "put the public . . in fear." The question is whether such broadly worded language would also serve to exclude damages from vandalism, riot and civil commotion, risks that are typically covered today.
If these terrorism exclusions do not work or do not fly, the industry is also pursuing assistance from the Federal government. Many refer to it as a "bailout" but that is not exactly what insurers are looking for. What they want is some sort of arrangement where the aggregate first-dollar liability of the insurance industry would be limited at some figure, say $10 billion. After that, the government (and its taxpayers) would split the cost 90%/10% (and you know who picks up the 90%).
As far as taking advantage of opportunities to get price increases is concerned, however, that process has already begun. We have seen renewal quotes this year with increases ranging from 25% to nearly 100% with little or no justification. The preferred method of imposing these increases seems to be to give notice of nonrenewal first, then offer a quote for the large increase on a take-it-or-leave-it basis. Ask for an extension so you can get alternate quotes, and you may have to pay double the equivalent monthly cost.
And we are constantly warned, by individual insurers and the trade press, that this is only the beginning. As insurers negotiate their contracts with reinsurers, the majority of which renew on January 1, the fear is that massive increases will be forced upon them. This has two consequences. The first is the self-fulfilling prophecy of major premium increases after the first of the year. The second stems from state law requirements for advance notice of premium increases and may result in nonrenewal notices because the insurance company will not know what kind of increases to require until their reinsurance negotiations are complete. In today's uncertain market, that may not be until just before January 1, if not later.
This was going to be an interesting year for renewals and the events of September 11 have only made it more so.
-- Christopher B. Ashton, CEBS
Vol. XIV, No. 4
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We all seem to agree that the events of September 11 have permanently altered life in America. Nowhere is that more apparent than in the insurance industry where estimates of insured losses resulting from the terrorist attacks are as high as $70 billion. It sounds like a lot of money (to paraphrase the late Sen. Everett Dirkson) but the industry probably has the capital to deal with it. What the industry doesn't want to do, however, is deal with future losses from terrorism, so we are going to see exclusions added to new and renewal policies, together with possible Federal government assistance. We are also going to see an acceleration of the hard insurance market and, in fact, we have already started to see significant price increases in virtually all lines of insurance. And we can expect even further cost increases after January 1, 2002. There is one segment of the insurance industry, however, that is not necessarily sorry to see what is happening to insurance prices, and that is the agents and brokers. What was shaping up to be a normal cycle of the insurance market may turn into a veritable windfall for producers whose income is tied to premium levels. Perhaps now is an appropriate time to seriously consider fee-based compensation for these salespeople. In this issue, we discuss some of these matters and talk about some of the things you can do to minimize the impact of the inevitable premium increases. On a lighter note, we also conclude our 50th anniversary reminiscences with Mike Coyle's essay on snow. --- Ed.
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