The Insurance Industry – helping while hit hard
In the aftermath of September 11, many insurance policyholders and investors legitimately have expressed concern over the viability of their insurers, the security of their policies and the future of their insurance investments.While the losses from last week’s terrorist attack will be huge (estimates are upward of $20 billion, exceeding the $17 billion from Hurricane Andrew in 1992), it is important to put them in perspective. The insurance industry generated premiums (revenues) of over $1 trillion last year; thus, the losses will be around 2of revenues, a manageable amount. Perhaps even more importantly, the insurance industry’s surplus - from which they pay out claims – is probably close to $500 billion, indicating a 4impact on surplus. Because the vast amount of the insurance written was reinsured, the brunt of the impact is likely to fall hardest on the reinsurers, many of which are based overseas in Bermuda, the UK, and Continental Europe.Policyholders have voiced concern over clauses written into many property and casualty insurance policies exempting insurers from claims emenating from broadly defined “acts of war” (but not of terrorism). While that may be construed as the letter of the law, companies are in no way obliged to abide by it, and the message being strongly sent from the insurance industry is that it will not invoke that war exclusion.In fact there is clear evidence that the industry is rushing to provide immediate money and support to its affected policyholders. Life insurance companies are working on ways to assist the beneficiaries of insured victims who may not be able to provide a death certificate for some time. For the first few days after the disaster, the only radio “advertisements” (if that is what they could be called) were from insurance companies, providing toll free numbers for their policyholders to call. The spirit of caring, support and kindness -- so evident in the daily images of the search, rescue and recovery teams -- is also driving the efforts behind the scenes in insurance offices around the country.While the near term impact on the earnings and cash flow of the insurance industry will be severe, it will not be crippling. The reinsurance industry will be most hard hit, and the repercussions will be felt in higher reinsurance rates, much as was the case in the aftermath of Hurricane Andrew. There might even be a few companies that do not survive, but the industry itself should certainly be able to recover without an infusion of government cash.