Reinsurers Feel Fallout of Terrorist Attacks

Most people think insurance companies must pay the price tag for damages caused by the recent terrorist attacks. But, in fact, the buck stops with companies that insure insurance companies: reinsurers.

Most insurance policies -- particularly high-risk ones -- are reinsured. That's certainly the case for insurance firms covering many of the companies impacted by the attacks. For example, the World Trade Center housed numerous high-risk companies, including international import/export, shipping, oil and financial companies, as well as foreign political entities, with a great deal of money at stake.

But reinsurance companies can foot the bill, industry experts say. The Pentagon announced on Friday that it will cost $520 million to repair the damage to its building, and insurers estimate a $70 billion to $100 billion price tag for the destroyed World Trade Center and to the businesses as well as the people who worked there.

Largest Single-Event Insurance Losses No surprise that the Sept. 11 attack tops the list
Event	Year	Estimated Insured Loss
Terrorist attack, Sept. 11	2001	$30 billion - $58 billion
Hurricane Andrew	1992	$20 billion
Northridge earthquake	1994	$16 billion
Cyclone Mireille	1991	$7 billion
Storm Daria	1990	$6 billion
Storms Lothar and Martin	1999	$6 billion
Source: Tillinghast-Towers Perrin for terrorist attack; Swiss Re for other events, which are inflation-adjusted to 2000 price levels

Insured Loss Amounts ($ billions)
Line of Insurance	Low	High
Workers compensation	$3.0	$5.0
Aviation	3.0	6.0
Commercial property	10.0	12.0
Life, AD&D	4.5	6.0
Liability	5.0	20.0
Business interruption	3.5	7.0
Other	1.0	2.0
Total	$30.0	$58.0
Source: Tillinghast - Towers Perrin estimates

Globally, reinsurers have $280 billion in capital on hand, according to Donald Watson, director of Standard & Poor's' insurance group. If the reinsurers need more money, they can raise it through equity and bond markets, Watson adds.

"Given the returns that insurance stocks had in 1992 following Hurricane Andrew and in 1994 following the Northridge Earthquake in California, it should be relatively easy for the reinsurers to raise cash because the perception among investors is that the insurance industry does very well following a catastrophe," Watson says.

Indeed, after such an event, the need for reinsurance companies grows. An increasing number of businesses and individuals seek greater insurance coverage and, in turn, those insurers will buy reinsurance policies. At the same time, the menace of terrorism increases the chance that clients will need to cash in their insurance policies and reinsurers will become reluctant to take on such risk. As a result, they will increase their premiums and rates. ...