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 For the first time in the hundred-year history of insurance industry record
keeping, an overall annual loss was reported by the nation’s leading property and
casualty insurers for the year 2001. Together, the dramatic effects of three completely
independent occurrences – the recession, the September 11th terrorist attacks and
the collapse of Enron – combined to create "a perfect storm" in the
insurance industry. With losses totaling $7.9 billion, insurers have begun to respond to
the past year’s financial results with stricter underwriting standards, reduced
capacity and higher premium rates.
THE ECONOMIC SLOWDOWN
Even before the tragic events of September 11th and the collapse of Enron (the effects of
which are discussed in The Enron Legacy, poor investment results
and a lagging economy signaled the beginning of a bad year for insurance companies.
Investments that had been reliable in past markets were producing lower returns in 2001,
investment gains were no longer adequate to cover underwriting losses, and insurance
companies were being forced to liquidate unsuccessful technology and venture capital
investments at a cost in the billions of dollars. As early as the first quarter, the
economic forecast for 2001 was gloomy.
THE SEPTEMBER 11TH ATTACKS
Although their full impact on the insurance industry may never be clear, claims related to
the September 11th attacks are expected to reach $70 billion. An estimated $10 billion in
claims have already been settled. Property claims, as well as business interruption
insurance claims, continue to be major sources of controversy and litigation. Court
rulings on cases related to September 11th are certain to affect future insurance and
reinsurance practices and profits. In the meantime, generally tighter limits and higher
premium rates have been placed on property coverage while terrorism and political risk
coverage have become extremely difficult and expensive to obtain. According to a recent
Federal Reserve survey, gaps in terrorism coverage have also created serious problems in
banking and commercial real estate, affecting the availability of commercial loans.
THE FORECAST FOR 2002/2003
The tragic lessons of 2001 demand collaborative and innovative insurance solutions for
2002. Government intervention in the form of "backstop" terrorism coverage is
expected to provide some degree of financial assistance in the event of future terrorist
attacks. Insurance brokers and other specialists are expected to work more closely with
risk managers in processing information and expanding risk management services. And
finally, insurers are expected to develop new methods of assessing and handling 21st
century risks so that future man-made disasters may be averted as policyholders, brokers,
insurers and legislators work together in a cooperative effort to renew and rebuild. |
