Insurance Prices, Restrictions Are Up

The attacks that shattered American notions of security a year ago also exposed how commercial insurers misjudged the threat of terrorism, an error they’ve since corrected with a vengeance by charging far higher premiums for far more restrictive policies.

When the World Trade Center towers collapsed, the insurance industry was recovering from a competitive battle that had many insurers providing coverage at a loss in an effort to build market share. With profits from stock investments--which had covered underwriting losses in the 1990s--evaporating and claims from storms and other disasters rising, property insurers already were restricting coverages and raising premiums sharply.

But the terrorist attacks, which caused the single largest loss in the industry’s history, revealed what investor Warren Buffett, whose central holdings are insurance companies, called a “fundamental underwriting mistake.�

The industry, Buffett told investors in his Berkshire Hathaway Inc., had failed to look ahead, training its attention on only traditional perils: “windstorm, fire, explosion and earthquake ... thereby assuming a huge terrorism risk for which we received no premium.�

After Sept. 11, the industry changed all that. Reinsurers such as Berkshire’s General Re, which spread risk by insuring other insurers, quickly dropped terrorism coverage. Regulators in 45 states approved a standard industry form that essentially gave primary insurers blanket permission to stop including terrorism in standard policies.

Regulators in California, one of the exceptions, required insurers to apply to exclude terrorism one line of coverage at a time. By July 24, the last time figures were compiled, state regulators had approved 392 such exclusion requests, said Insurance Department spokeswoman Nanci Kramer.

Since the federal government has yet to adopt a backstop plan to absorb some terrorism costs, the terrorism coverage that is available from a few insurers, including Berkshire Hathaway, is a high-priced add-on, with higher deductibles and more exclusions--or part of a package at drastically higher prices.

In a recent survey of corporate insurance buyers, Prudential Securities found that nearly two-thirds of businesses expect to do without terrorism coverage and 14% expect to have it, but with lower coverage limits than for other types of insurance. Only 24% anticipated having full coverage.

Insurance Rates Climb

Analysts say the attacks reinforced the trend to hike rates across all lines of property insurance, not just those directly threatened by terrorism, ultimately strengthening insurers’ financial position--albeit aggravating their customers.

If not for Sept. 11, these broad increases “might have proven difficult in some insurance lines because of ample surplus capital, intense price competition and the challenge of raising rates during a recession,� Bryan Gobin, an insurance specialist at consulting firm Economy.com, said in a recent report.

Annual rate increases for commercial property insurance, which were running at 10% to 15% before the attacks, average 30% today, with casualty coverage including workers’ compensation and professional liability up 20% to 25%, said economist Robert Hartwig of the Insurance Information Institute, a trade group. Insurers’ premium revenue from writing commercial insurance policies is expected to rise 20% this year, Hartwig said.

The amount of increase varies widely, Hartwig notes, with some small businesses in remote locations hardly affected. But for businesses most likely to be affected by terrorism, “the effect has been extraordinary,� said Santa Ana attorney Boyd F. Jensen II, who represents operators of amusement parks, a sector that along with high-rise towers, stadiums and other landmark properties has been socked with huge insurance rate increases.

One amusement park company recently was turned down by two large commercial carriers that previously had offered coverage, Boyd said. Other policies were so expensive that the company finally cut costs by raising its deductible from $10,000 to $100,000, he said.

Though extreme, that example shows the strains that are being placed on businesses across the country by a catastrophe whose final cost has been estimated at $30 billion to $70 billion. The latest estimate from the Insurance Information Institute is that the total insured loss from Sept. 11 will be $40.2 billion.

Some Claims in Dispute

Business interruption is likely to be the biggest single loss category for the industry, accounting for $11 billion, or 27%, of the total loss, the insurance institute estimates.

But many such claims remain open because records needed to document losses were destroyed in the attack, or because the businesses still are operating out of temporary quarters and receiving payments until they establish a new permanent location.

Although the industry received high marks for not invoking war exclusions, and for the speed with which foreign insurers stepped up to bear their half-share of the liability, some disputes over coverage have emerged.

The industry has refused to pay business-interruption claims by airports and hotels far from the cordoned-off disaster zones of Lower Manhattan--facilities that nonetheless suffered huge indirect losses when the Federal Aviation Administration grounded air traffic after the attacks.

Some of those locations, including airports in Chicago and Las Vegas, have asked courts to force the insurers to pay. Hartwig estimated that the lawsuits, if successful, would add less than $1 billion to the insurers’ liability.

A potentially more costly dispute involves World Trade Center leaseholder Larry Silverstein and a group of 20 insurers led by Swiss Re, a big Zurich-based reinsurer. The insurers contend that the trade center attacks constituted one catastrophic event for insurance purposes, while Silverstein argues that each of the two jetliner crashes was a separate event.

Should Silverstein prevail, the industry will be required to pay $7 billion for Twin Towers property damage instead of $3.5 billion, Hartwig said.

Insurance rates for most home and auto coverage, although rising because of other factors, showed little direct effect from Sept. 11, since less than 2% of the loss involved personal property, said Gordon Stewart, president of the insurance institute.

But the psychological effects of the attacks affected the life insurance industry. Within a month of the attacks, 6% of Americans bought or increased their life insurance, according to a Harris Interactive poll, and sales were 15% greater in the fourth quarter of 2001 than in the same period a year earlier.

Wall Street has judged the industry more positively since Sept. 11. A Standard & Poor’s index of property and casualty insurers that stood at 217.45 the day before the attacks climbed as high as 261.64 in April, a 20% gain, as investors decided that premiums were certain to rise.

The index then fell 28% to 188.79 in July amid a general sell-off in stocks and fears about insurers’ liability for the waves of corporate scandals and shareholder lawsuits sweeping the country.

Since then, the index has climbed back up to 211.42 at Friday’s close--a loss of 2.8% since the attacks, compared with an 18.6% decline for the S&P; 500.