Gordon Feller provides an overview of the US market.

The destruction of the World Trade Center has changed attitudes to risk worldwide. The impact of the terrorist attack resulted in the worst US catastrophe, at least more than twice the cost of 1992's Hurricane Andrew, the costliest loss before September 11 last year. World Trade Center also caused the greatest loss of life, affected more types of insurance than any other disaster, and made both insurers and their policyholders reconsider their risk exposures.

As a direct result, individuals are buying more life and disability insurance; businesses are looking to better protect their assets; and insurers, particularly reinsurers who will bear the brunt of World Trade Center losses, are being more selective about risks they assume.

An insurance company's ability to underwrite insurance policies is tied to its capital and the riskiness of what it insures. With less capital now available - as much as $70bn could be needed to pay WTC-related claims - prices for many types of insurance are rising. In addition, reinsurers say they will no longer cover future terrorist acts because it is impossible to set a price for coverage of this vast, unprecedented risk.

Catastrophic losses due to windstorms and earthquakes tend to hit the personal lines insurers the hardest because they cover homes and private passenger cars. The World Trade Center disaster will have a stronger impact on commercial lines companies which insure businesses.

Initial estimates by the Insurance Services Office, Inc (ISO) put the cost of property damage from the disaster at $16.6bn. Property damage includes claims for business interruption, which compensates for income lost when a firm is forced to suspend business operations either due to direct damage to the premises or because the civil authorities cordoned off the area to pedestrian and vehicular traffic after the disaster, preventing entry to the premises. Also covered are contingent business interruption losses such as those arising from a firm's inability to conduct business because of the shutdown of a major entity such as an airport. Some of the more complex claims may take years to settle.

ISO predictions for other kinds of insurance include between $4bn and $6bn for workers' compensation claims, covering both payments to the families of the people who died, and payments for medical care and lost income to those who were injured; aviation losses of $5bn to $9bn; and liability claims ranging from $3.5bn to $20bn. Liability claims are hard to estimate because of the difficulty of predicting in this wide-ranging disaster the type and number of lawsuits that might be filed and the eventual outcome.

Life insurers are expected to pay out between $3bn and $5bn in death claims. Close to 3,900 people were killed in the terrorists' attacks.

Other large man-made disaster losses in the last decade include those stemming from the Los Angeles riots in 1992, which reached $775m and the World Trade Center bombing in 1993 totaling $510m.

As of the second week in December 2001, some 20,463 claims had been reported or paid by 111 insurance companies, totaling $12.2bn, according to the New York Department of Insurance. Out of the 12,460 commercial claims, 3,997 were for business interruption losses with payments amounting to $2.33bn.

One suit already filed seeks to resolve some of the issues surrounding claims over the destruction of World Trade Center complex, including whether the disaster was one insurable event for which liability would be capped at $3.6bn, the per event amount of insurance taken out on the buildings, or two because two planes were involved. Basic policy language usually defines multiple occurrences within a certain period of time as one event.

Eligible claimants from the September 11 Victim Compensation Fund of 2001 include individuals who sustained injury and the personal representatives of those who died at the crash sites in the immediate aftermath of the attacks or in the hijacked airplanes. Claimants may seek compensation for monetary losses to the extent allowed by state law and for non-economic losses such as pain and suffering. Under the Act, payments from the fund must be reduced by the amount the claimant can receive from collateral sources. Since there is no definition of this term in the bill, the `special master' who will set the rules and administer the fund will have to decide which kinds of payment likely to be received by victims - such as workers' compensation and life insurance, pension funds and charitable contributions - fall into the category of collateral sources. The fund has no cap on payouts but families who submit claims to the fund must give up their right to sue and to appeal the special master's decisions.

For those who decide to forgo fund payments and sue the airlines, the Act creates a federal cause of action but requires damages to be decided based on the law of the state where the crash occurred. The law does not say how the limited funds available to pay any awards would be apportioned in the event that many people file lawsuits.

Windstorm losses
The enormity of the World Trade Center has overshadowed what is still the greatest threat to insurers and their policyholders: natural disasters. If a mega-hurricane or earthquake hit a major city it could cause as much - if not more - damage than the terrorist attack.

The 2001 hurricane season was somewhat busier than predicted by veteran forecaster William Gray of Colorado State University, with 15 named storms. The last one, Olga, was still active on November 30, the last day of the official season. Gray had forecast 12 named storms, seven of them hurricanes and three of these intense, at category 3 or higher. In the event, there were eight hurricanes, of which four were intense. The first hurricane formed late in the season, and October and November were the busiest in the past 50 years, according to Gray.

Even before the World Trade Center disaster, 2001 was a bad year for catastrophes, with $5.9bn in the second quarter, the highest quarterly sum in a decade. This brought the total for the first six months of the year to $6.6bn. There were nine catastrophes in the second quarter, a relatively low figure compared with other second quarters. For the second consecutive year, no hurricanes hit the US mainland, an unusual situation that has not occurred since the early 1980s. However, tropical storms Allison, Barry and Gabrielle, which did make landfall, were almost hurricane strength.

Tropical storm Allison, the first named storm of the 2001 Atlantic hurricane season, caused widespread flooding in southeast Texas, southern Louisiana, and four other states in early June. At least 40 deaths have been attributed to the storm which dropped as much as three feet of rain on Houston, Texas.

Federal assistance to flood victims totaled $1bn. Insured property damage, including flood-damaged cars, amounted to $2.5bn, more than double the original estimate, according to ISO, making Allison the sixth costliest US catastrophe. Insured losses were high because Allison damaged so many cars. Flooded homes are generally not covered under private insurance policies but vehicles are. Gabrielle, which made landfall in mid-September, caused about $115m in damage in Florida, according to ISO, due mostly to heavy rain.

By Gordon Feller
Gordon Feller is an independent researcher and journalist whose clients have included the World Bank, the Financial Times and McGraw Hill. In addition, he has devised numerous international risk conferences, acted as an advisor to multinational corporations including Chevron, Bechtel and IBM, and worked with non-profit think tanks such as the World Policy Institute.