Property/Casualty Insurers and Reinsurers Fare Well in Spotlight
By Robert Warne - October 11, 2001The Sept. 11 terrorist attacks changed the way we look at life and changed our perception of what is really possible. Up until this event, Hurricane Andrew in 1992 was the benchmark catastrophe—costing Property/Casualty Insurers $18 billion. With the Sept. 11 damage currently expected to cost the insurance industry $30 to $58 billion, this tragedy will indeed shape the future of underwriting policies.
Insurance companies bearing the financial brunt of the tragedy have done exceptionally well in the last 30 days. Insurers as a whole are even doing better in the stock market than they were prior to Sept. 11.
A Securities and Exchange Commission probe is underway to determine whether people with foreknowledge of the attacks sold short prior to Sept. 11. Whether this occurred or not, legitimate investors have jumped on the opportunity to pad their portfolios with property/casualty insurance and reinsurance stock at bargain prices.
Insurance analyst Todd Bault with the advisory firm Sanford C. Bernstein said according to SmartMoney.com, "Investors are starting to realize that large sections of the industry are not going to go bankrupt from this."
Michael Lyons, a senior trader for Morgan Stanley Dean Witter according to AFX said, the reason why the insurance sector has done well as a whole is that, "Rising tide raises all boats." He also said, "People think they’ve[insurance companies] been hammered really hard. If you don’t buy them now, when do you buy them?"
The bargain prices didn’t last for very long though. Once investors could discern how the event was going to impact insurance companies, shares of insurers and reinsurers have rallied in the last couple of weeks. Companies such as The Chubb Corp., American International Group, XL Capital, PartnerRe Ltd., and Berkshire Hathaway have the sufficient capital to cover costs and expect to benefit in the long run from circumstances created by Sept. 11.
PartnerRe President and CEO Patrick Thiele said, "We also anticipate that the tragic events in the United States will result in across-the-board increases in demand and premium levels for reinsurance. For 2002, we expect net premium growth to be more than 25% and, absent unusual catastrophe events, a combined ratio in the low to mid 90’s."
Thiele also said the Sept. 11 events, "illustrate the value of reinsurance to our clients. PartnerRe has the capital, the skills, and the appetite to help clients manage their risks effectively in this new world."
Insurance companies can handle the costs of this tragedy, but confidence wanes when the topic of whether they could handle a chain of similar events is discussed. The immediate fix for insurers to protect themselves is to add a terrorist exclusion clause to policies upon renewal.
Along with the extensive safety measures currently being implemented to reduce potential terrorist threats, lawmakers are seeking guidance from insurers to develop a course of action on how to insure future acts of terrorism.
Ronald Ferguson, chairman of General Re Corp a subsidiary of Berkshire Hathaway as quoted by Dow Jones said, "But until those efforts have borne the fruit of significant reduction in the potential for terrorist attacks, it is close to impossible for many insurers and reinsurers to responsibly underwrite or assume terrorism risk."
Also according to Dow Jones, Dean O’Hare, chairman and chief executive of Chubb said, "Legislation is needed quickly. We cannot insure risks that are infinite and impossible to price."
Brian M. O’Hara, president and CEO of XL Capital said, "Although we are confident about our prospects, the third quarter of 2001 has been the worst in the history of the property and casualty insurance industry. In addition to our claims resulting form the attack on the United States, our third quarter results will include a provision of approximately $100 million for other events, including the results of newly-acquired Winterthur International and losses stemming from the airport attack in Sri Lanka, the recent explosion in Toulouse, France, and our Lloyd’s operations."
AIG Chairman Maurice Greenberg said that despite a one-time charge and the Sept. 11 attacks, AIG’s third-quarter earnings will be "pretty much on target."
Lawmakers have commended insurers for their quick response to paying claims. Insurance companies haven’t sought war exclusions on policies and in many cases waived requirements pertaining to death certificates.
One of the remaining factors impacting the final cost to insurers is how they will classify the Sept. 11 tragedy. Defining the events of Sept. 11 as one single accident or a series of separate accidents will have an impact on the total cost. This is a crucial question because many policies put separate limits on per accident and per policy. If the initial response from insurers is any indicator, they will maintain the positive image they’ve established and pay the maximum amount per policy this time around.
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