Even as the losses from 11 September are still being totalled up, the re/insurance industry is coming to terms with a new age. The perception of risk has changed. As people open their mail, they look nervously for signs of traces of white powder. As planes soar overhead, pedestrians glance at their flight paths. The abandoned package, the agitated stranger, a strange odour on the public transport system – all these are becoming factors of everyday life in the western world. Gradually we are all adapting to the new risk environment.
That inevitably translates into much larger terms for the risk-bearing industry. In a move very similar to that taken by the UK property re/insurance sector after massive terrorist attacks on central London, the US industry is arguing that terrorism no longer is an insurable risk. At time of writing, the National Association of Insurance Commissioners was gathered in Washington, DC, looking into the insurance issues surrounding the 11 September attacks. Addressing the gathering, Sheila Bair, assistant secretary of the Treasury for Financial Institutions, made clear the official attitude to the terrorism problem. “We do not want the solution to this immediate problem to involve creation of an intrusive system of federal insurance regulation.”
Two days later, in Congressional testimony, NAIC President and Kansas Insurance Commissioner Kathleen Sebelius described the NAIC's guiding principles on the matter. “There is a need for the federal government, working with the state regulatory system, to provide appropriate assistance to spread the risk of terrorism coverage,” she said. “In doing so, however, Congress should begin its consideration of federal assistance to the insurance industry by recognising the strength and adaptability of the private insurance markets.”
Where does this leave the industry?
AIG has already put together a consortium providing $1bn aviation liability coverage, of which $400m had been taken up by airlines, said AIG chairman, president and CEO Hank Greenberg when addressing the NAIC gathering. He was confident the commercial market would come up with a solution to the property terrorism capacity crunch – but not before year end. In the meantime, coverage is being severely restricted. Whether a similar mechanism to the UK's Pool Re, for which the UK government acts as reinsurer of last resort for mainland terrorist attacks, will be implemented is still in the air.
Where the reverberations of 11 September eventually settle is anyone's guess. Estimates for total losses range between $30bn and $70bn, and it will take many years for the final bill to be known. Even that may be an understatement of the true cost: finite risk reinsurance contracts could mask anything between $3bn and $6bn losses, according to estimates from rating agency Fitch. In the meantime, Lloyd's is finding itself in a tight spot with its exposures. With £5.4bn gross losses, the market have been relieved that its recent extensive use of reinsurance brought this down to an estimated £1.3bn net. Then it appeared to receive dispensation from the NAIC to reduce the funding requirements of its WTC exposures to 60% of gross losses. This had already resulted in cash calls on Lloyd's members reaching towards $1bn. But Lloyd's appears to have misunderstood the NAIC's intention, and will now be required to fund its gross reinsurance exposures 100% – estimated by some at more than $5bn. At time of writing, the outcome of this change, and the ability of Lloyd's to meet this demand without certain syndicates seriously compromising their future liquidity. Even so, the NAIC's reinsurance task force is working alongside the New York Insurance Department to “perform the necessary analysis and identify appropriate remedies” for the liquidity positions of each Lloyd's syndicate. An examination of Lloyd's loss estimates and security will be started before the end of the year.
But just as seedlings sprout in forests devastated by high winds, so the 11 September catastrophe is already propagating new re/insurers. In moves reminiscent of the post-Andrew market, new capital is already setting up, primarily – again – in Bermuda. Though surprisingly few market players are looking particularly insecure at the moment, capacity in certain lines is. HartRe has stopped writing international business, as has CNA Re, and Alleghany Underwriting has all but pulled from property treaty business. Many other re/insurers have not as yet nailed their colours to the mast, but there is little doubt there will be more withdrawals from certain classes, and rates will continue their ascent. As well as the new reinsurer formations, more captive formations and greater use of existing facilities, and an increased interest in alternative risk financing mechanisms are all on the cards. The new dawn is upon us.Sarah Goddard is the editor of Global Reinsurance.