September 11 Insurance Industry Finance Essay

Sept. 11 onslaughts exposed insurance industry to new and unheard costs of planetary terrorist act. Terrorist onslaughts on Sept. 11 were the most expensive insurance event in history boulder clay that day of the month. Sept. 11 onslaughts cost about $ 40 billion to the insurance industry ( Hartwig, 2002 ) . The old biggest individual event insurance loss was $ 19 billion for Hurricane Andrew ( Hartwig, 2002 ) . Insurance losingss from Sep 11 onslaughts are about double the losingss from any event before that.

The most important facet of this immense insurance loss was that insurance companies paid claims for an event that was n’t even decently priced in premiums. Terrorism related insurance was covered but non clearly defined and demarcated in insurance policies. “The unthinkable was insured” said Mr. Leidthe ( Williams, 2002 ) . The extent of Sept. 11 losingss has changed the hazard profile of insurance industry dramatically. Lloyd ‘s Chairman S. Riley said “In a universe station September 11, when the really nature of hazard has so basically altered..” ( Lloyd ‘s, 2001 ) .

Extent of insurance losingss
Sept. 11 onslaughts cost about $ 40 billion to the insurance industry ( Hartwig, 2002 ) . The bulk of losingss were borne by the non-life insurance companies with life insurance companies paying about $ 2.7 billion merely. Though life insurance loss is non important as that of non-life insurance, yet it was significant figure in itself and by far the highest individual event life insurance loss boulder clay day of the month.

The tabular array 1 below shows the line of concern losingss for Sep 11 onslaughts. The highest individual line loss was suffered for concern break and its portion of entire losingss was 27 per centum. The combined loss suffered by belongings line was 24 per centum.

Table 1 – Line concern losingss for the insurance industry

$ billion

Insurance Losingss


Property – WTC 1 & A ; 2


9 %

Property – Other


15 %

Business Break


27 %



7 %

Workers compensation


5 %



10 %



27 %



100 %

( Beginning: Insurance Information Institute, 2002a )

The losingss incurred by the insurance industry were unprecedented in many facets. It was the largest individual event insurance loss – both in footings of natural and semisynthetic catastrophes till that day of the month. It was besides the first clip when losingss were ruinous in life insurance, disablement and worker compensation insurance sectors. It was besides the largest loss for the air power insurance.

Insurance industry had antecedently besides faced panic losingss. The tabular array 2 below lists the major terrorist onslaught losingss in past. The old highest insured belongings loss in any terrorist loss was $ 907 million for a bomb detonation near NatWest tower in London in 1993. The insured belongings loss in Sep 11 onslaughts was $ 20 billion, approximately 22 times more than the highest old loss. This immense addition in losingss caught most of the insurance companies incognizant and presented a scenario which was non modelled earlier.

Table 2 – Major terrorist onslaught losingss



Losingss * $ Millions

Sep 11, 2001

9/11 onslaughts


April 24, 1993

Bomb near NatWest tower in London


June 15, 1996

IRA bomb near Manchester Mall


February 26, 1993

Bomb in WTC Garage


April 10, 1992

Bomb in London Financial District


* Insured belongings loss

Adjusted to 2001 monetary value degree

( Beginning: Insurance Information Institute, 2002a )

Sept. 11 terrorist onslaughts besides showed the planetary integrating of insurance industry. More than half of the concluding payouts were from non-US companies ( Williams, 2002 ) . Though this caused broad spread losingss across boundary lines, yet it besides prevented more bankruptcies. The industry has learnt a lesson from this and now more insurance companies and re-insurers are organizing pools to subvention insurance.

Insurance industry reaction
Industry broad large alterations in insurance sector usually occur at the clip of some ruinous events and losingss. After Hurricane Andrew in 1992, insurance companies started bear downing high premiums in coastal zones and require particular windstorm tax write-offs. The station Sept. 11 insurance industry alterations are similar to post Hurricane Andrew alterations. Insurance industry has taken many stairss to cut down possible losingss.

The first measure was to raise premiums. The station Sept. 11 insurance premiums were much higher and it was non unusual to see premiums runing from 7 per centum to 10 per centum of the declared value of coverage in the beginning of 2002 ( Hartwig, 2002 ) . Lloyds of London are now offering premiums runing signifier 1 per centum to 5 per centum of the bound value ( Hartwig, 2002 ) . The monetary value may fall further in future as the capacity in the insurance sector additions. The mean addition in insurance premium was around 30 per centum by the 2nd half of 2002. The addition was caused by both decrease in capital supply and higher demand of insurance in visible radiation of increasing dangers. With the transition of clip, the rise in premiums has slowed down once more as more and more capital flows in the insurance industry and creates higher competition. The decrease in militias post Sept. 11 coupled with regulative capital demand took many insurance companies and re-insurers to the capital markets. Insurance industry had raised entire capital of $ 28 billion by June 2002 ( Hartwig, 2002 ) . Even though premiums will fall, it is improbable that the coverage offered will fit pre Sept. 11 coverage.

Airline industry was one of the hardest hit by the addition in insurance premiums. Coupled with high losingss due to flight cancellations, it approached authoritiess to bail it out. Many authoritiess offered panic hazard insurance to air hoses.

The addition in premiums has reduced the combined ratios to about the lowest degrees seen in the decennary before Sept. 11 onslaughts. It reduces the trust of insurance companies on investing income. The industry has seen that low investing returns and high panic losingss can happen at the same clip and hence it would be naive to trust on investing returns to countervail underwriting losingss.

The cardinal lessons learnt by the insurance industry from Sept. 11 onslaughts are:

  • Insurance companies are cognizant of larger possible losingss
  • Sum of hazard capital required to back up insurance is really high
  • Reduced capacity consequences in supply versus demand force per unit areas
  • Insurance industry should non establish its theoretical account on investing returns counterbalancing underwriting losingss

The staying portion of the paper looks at the effects of Sept. 11 onslaughts on the insurance industry. Section II looks at the short term effects and subdivision III surveies the medium to long term effects. The paper concludes with subdivision IV.

Insurance industry had to instantly lift to the juncture which was non even decently thought besides. Its short term reactions were cardinal to the stableness of fiscal industry. The following are the chief short term effects of the Sept. 11 onslaughts on the insurance industry

  • Ability to pay

The onslaughts were the large trial of planetary insurance industry and demonstrated the fiscal strength of the insurance industry. In malice of the negative returns from stock markets in 2000 and 2001, insurance industry has managed to pay insurance claims associated with Sept. 11 terrorist onslaughts. A major factor in that is the spread of payments over clip. Harmonizing to a survey by A. T. Kearney, merely about 15 per centum of entire claims were settled in 2001 and about 50 per centum of claims were to be settled in 2002 and 2003. The staying 35 per centum of claims were to be settled in 2004 and beyond because of the nature of losingss related to hurt and pollution. The above spread of payouts agencies that insurance companies had to pay approx. $ 6 billion merely in 2001, an sum absorbed by the insurance industry without much of fiscal harm. The primary insurance companies and re-insurers raised their premiums instantly after Sept. 11 and that will absorb or even exceed Sept. 11 onslaughts payout in staying old ages.

Merely one re-insurer, Nipponese re-insurer Taisei Fire and Marine, had to register for bankruptcy due to its high exposure in the air power insurance sector. Ichiro Ozawa, the president of now belly-up Nipponese re-insurer Taisei Fire and Marine said that the loss from reinsurance was caused strictly by the terrorist onslaughts and they could non anticipate that such a immense loss would be generated because the four aeroplanes at the same time crashed ( BBC, 2001 ) . Its place was further financially weakened by the Nov 12, 2001 clang of an American Airlines flight. Another re-insurer Copenhagen Re stopped accepting new concern after Sep 11 onslaughts. But no primary insurance company filed for bankruptcy.

Another ground for insurance industry ‘s ability to pay immense claims was the broad spread of hazard among a big figure of insurance companies and re-insurers. Till July 2002, a sum of 119 insurance companies worldwide had announced their exposure to the Sept. 11 onslaughts ( Hartwig, 2002 ) . Widespread usage of re-insurance was the key in forestalling big figure of insolvencies.

The tabular array 3 below shows the estimated insurance losingss related to Sept. 11 onslaughts in July 2002. The largest portion of individual insurance company, Lloyd ‘s of London was merely 7 per centum. This shows the spread of insurance hazards and the outstanding ground behind merely one bankruptcy due to Sept. 11 onslaughts.

Table 3 – Estimated losingss of major re-insurers

$ 1000000s

Estimated losingss

% of entire losingss

Entire losingss


100 %

Lloyd of London ‘s


7 %

Munich Re


6 %

Swiss Re


6 %

Berkshire Hathaway


6 %



3 %

( Beginning: Hartwig, 2002 )

The insurance industry ability to pay claims strengthened investors faith in it and helped the industry to raise farther capital.

  • Underwriting losingss

Prior to Sept. 11, insurance companies were gaining overall net incomes largely through returns on investings. But the two old ages of equity market losingss in 2000 and 2001 forced insurance companies to re-look at their concern scheme. The magnitude of Sept. 11 losingss meant that equity returns were n’t plenty to give overall positive net incomes. Insurance companies were forced to abandon the pattern of accepting losingss on subventioning concern in the hope of covering loss by high investing returns. This means that insurance companies had to increase premiums to cut down dependance on investing returns.

  • Monetary value of insurance premiums

Primary insurance companies and re-insurers have hiked their premiums since Sept. 11 terrorist onslaughts ( General Accounting Office ) . The tabular array 4 below shows the addition in insurance premiums across different lines of concern in the first half of 2002.

Table 4 – Addition in insurance premiums in the first half of 2002

0 %

1-10 %

10-20 %

20-30 %

30-50 %

50-100 %

& gt ; 100 %

Workers Compensation

5 %

13 %

19 %

32 %

15 %

5 %

2 %

General Liability

2 %

9 %

24 %

45 %

15 %

2 %

1 %

Commercial Umbrella

2 %

4 %

10 %

20 %

27 %

17 %

16 %

Commercial Property

3 %

4 %

16 %

30 %

31 %

13 %

1 %

Business Break

3 %

8 %

32 %

33 %

10 %

1 %

0 %

( Beginning: Hartwig, 2002 )

We can see that the per centum of no additions in insurance premiums for all lines is merely in individual figures. The average addition scope is between 20 per centum to 30 per centum. Both commercial umbrella and commercial belongings insurance lines have similar per centums in 20-30 per centum and 30-50 per centum scope which implies that mean for these insurance lines would be more than 30 per centum most likely. In instance of commercial umbrella, there were 16 percent insurance companies who increased the premiums in the first half of 2002 by more than 100 per centum.

In US, insurance premiums were already lifting in 2000. General Accounting Office of US said that insurance premiums were already increasing for commercial coverage prior to Sept. 11 ( General Accounting Office ) . It besides said that insurance industry members told it that the additions were a portion of the underwriting rhythm normal. Yet the GAO acknowledges that the insurance losingss from Sept. 11 terrorist onslaught about surely exacerbated the rise in premiums. Net written premiums rose by 5.1 per centum in 2001 ( Insurance Information Institute, 2000b ) .

The addition in the insurance premium was a consequence of both lessening in supply and addition in demand.

  1. Decrease in supply capital.

The high unnatural losingss sustained due to Sep 11 onslaughts reduced the capacity available to the insurance industry for composing new concern. Another factor lending to the decrease of capital was the diminution in equity markets. Equity markets were on a diminution since March 2000 and as insurance companies invest a big portion of their free hard currency in equities, it meant that they needed more militias to countervail losingss suffered in the equity markets. Lower sum of capital meant that insurance companies could take the policies and / or markets offering high insurance premiums.

  1. Addition in demand.

The graduated table of losingss from Sep 11 onslaughts once more brought back the attending to the graduated table of hazard concerns carried and the necessity of a mechanism to countervail it. Well diversified companies in footings of geographical range like British Petroleum have the option of “self-insurance” . BP decided based on the broad spread geographical spread of its concern units and workss that an onslaught or a loss of a individual location would non endanger the whole concern. It is besides improbable that more than one location will confront ruinous catastrophe at the same clip. Hence BP took the determination of non paying high insurance premiums every twelvemonth.

But less diversified concerns do n’t hold this option. The terrorist onslaughts increased the demand of insurance policies from concerns. The fright of the loss additions demand and London insurance companies Catlin and Hiscox have predicted that the Katrina hurricane in USA would hike insurance demand and rates ( Slater, 2005 ) . Lloyds and other insurance companies predict that the Katrina hurricane would do heavy losingss but would be good in the longer term as it will force monetary values for affected hazards steeply up.

At the same clip there is some rationale justifying addition in insurance premiums. Insurance premiums usually follow cyclical tendencies based upon the capacity and willingness of primary and re-insurers to take hazard. Prior to Sept. 11 onslaughts, the insurance premium rates had peaked in 1993 and since so they were on changeless diminution ( OECD, 2002 ) . The rates had merely stabilised in 1999 and started traveling up in 2000 merely. Even after one twelvemonth of premium additions since Sept. 11 onslaughts, the insurance premiums are still lower than the extremums seen in 1993.

  • Underwriting losingss

Since 1975 boulder clay 2001, insurance industry had underwriting additions in merely two old ages and that excessively in every bit early as 1977 and 1978. Since 1978 the insurance industry had systematically made underwriting losingss and they were approximately $ 30 billion in 2000 besides ( Insurance Information Institute, 2002a ) . The addition in insurance premiums would cut down underwriting losingss.

  • Combined ratio

The combined ratio for US reinsurance sector was highest and worst of all time in 2001. It was 142.9 per centum in 2001 and following highest ratio was 126.5 per centum in 1992. This shows the extent of losingss due to Sept. 11 onslaughts ( Insurance Information Institute, 2002a ) . The combined ratio for Lloyd ‘s reinsurance in 2001 was 142 per centum ( Lloyd ‘s, 2001 ) . The combined ratio was 116 per centum for all lines combined ratio. The combined ratio for all lines combined was besides highest in 2001 but the following high was 115.8 per centum in 1992 ( Insurance Information Institute, 2002a ) . So the impact on all lines combined ratio was non every bit bad as on re-insurers.

High premiums post Sept. 11 onslaughts resulted in one of the lowest combined ratio in 2002. The combined ratio for the US reinsurance was 102.3 per centum in the first one-fourth of 2002 and it was really near to the lowest of 100.5 achieved in the past one decennary ( Insurance Information Institute, 2002a ) . For all US lines combined, the ratio at 101.6 per centum was the lowest in last one decennary. This shows that the addition in premiums has significantly increased the profitableness of insurance industry.

  • Coverage

The unprecedented high losingss stemming from Sept. 11 onslaughts forced insurance companies to re-look at the scope of hazards covered. Another major station Sept. 11 measure was the decrease of coverage offered by the insurance companies. Mr. Hess of Swiss Re said in 2002 that Swiss Re had cut its possible exposure to less than half for events similar to assail on World Trade Centres ( Williams, 2002 ) . Patrick Liedthe, Secretary General of the Geneva Association besides reiterated the above point and said that the exposure of the planetary industry to terrorist onslaughts is much lower station Sept. 11 onslaughts ( Williams, 2002 ) .

Terrorism exclusion
One of the most important policy alterations in the station Sept. 11 insurance sector is the debut of terrorist act exclusion from general insurance policies. Insurance industry was covering terrorist act related hazards even after the first onslaughts on World Trade Centres in 1993 and Oklahoma City bombardment in 1995. The fact that the hazard was covered for really small or no premium instantly forced most of the insurance companies to except Acts of the Apostless of terrorist act from general insurance coverage.

The other options to terrorism exclusion were either to halt composing new concern in soft mark industries like commercial landmarks, chemical and power workss etc or to bear down steep premiums to take attention of more frequent terrorist onslaughts. The absence of statistically important informations hindered the speedy development of rationally justified terrorist act hazard pricing. If insurance companies stop composing new concern because of terrorist act hazard so it would expose concerns to fiscal hazard from so many other events like fire, inundations, etc. So it was better to except terrorist act hazard in the immediate wake instead than pricing irrationally or halt composing new concern.

After initial backdown period of terrorist related insurance, private insurance market once more saw insurance merchandises for these types of major onslaughts ( OECD, 2002 ) . Some of the insurance instruments like ruinous bonds already existed in the private market even before Sept. 11 onslaughts. Catastrophic bonds are non actively traded and are chiefly used for particular events instead than being available for general usage.

The reluctance of insurance companies to cover terrorist act insurance and the high premiums charged by many insurance companies has left many companies with no terrorist act cover. In July 2002, about half of the concerns were non covered by terrorist act screen at all ( Hartwig, 2002 ) . Merely 14 per centum of concerns had full coverage. This shows that merely a minority of concerns are to the full prepared to confront panic hazards. Even though most of the companies do n’t hold self-insurance luxury that can be afforded by large multinationals like BP, they are non prepared to pay high insurance premiums to safeguard their concern against panic onslaughts.

Insurance Information Institute has a Rate On Line index which correlates the nexus between monetary value of insurance and the bounds of hazard offered. The Rate On Line was 130 in 2001 and it increased to 215 in 2002 after steep addition in premiums and decreased bounds ( Insurance Information Institute, 2002a ) .

  • Rebuild militias.

The high unnatural losingss of Sept. 11 onslaughts resulted in $ 80 billion decrease in insurance industry ‘s ability to run into future insurance claims ( Williams, 2002 ) . The decreased capital base and increase modesty demand to manage equity losingss mean that many companies were either unable to take any farther dazes or had to raise farther financess to beef up their capital base. Many companies raised extra capital to run into regulative capital demands.

By the terminal of 2001, insurance companies had raised $ 20 billion in new capital ( Hartwig, 2002 ) . And by June 2002, the entire capital raised increased to $ 28 billion. The gait of capital elevation slowed down significantly thenceforth as the militias rose due to higher premiums. It is difficult to categorize the sum of capital raised individually into terrorist act related insurance and other insurance lines. They thing of import here is to observe that Sept. 11 onslaughts acted as a accelerator for fund elevation.

  • Role of authorities

As a consequence of complexness in pricing terrorist hazards and associated high losingss, many insurance houses withdrew hazard coverage of terrorist onslaughts. This left many houses, vulnerable to such onslaughts, exposed to immense losingss in instance of terrorist onslaughts. US authorities so promulgated Terrorism Risk Insurance Act 2002 to cover major terrorist hazards.

  • Aviation insurance

We now look at the air power insurance industry, one of the two chief insurance sectors affected by the Sept. 11 onslaughts. It was the first sector to respond and it is a general belief that station Sept. 11 articulatio genus dork reaction of the air power insurance sector was an act of over reaction. Giles Williams of Wills Global Aviation said that the industry over reacted and it should n’t anticipate net incomes in the twelvemonth of its biggest loss ( Shapiro, 2002 ) .

Aviation insurance sector lost $ 5.5 billion in 2001, out of which $ 3.97 billion was related to Sept. 11 onslaughts entirely ( Shapiro, 2002 ) . The high loss prompted air power insurance companies to non merely fleetly raise premiums after the onslaughts but besides enforce new surcharges. Aviation insurance companies started bear downing $ 1.25 per rider surcharge to refill premiums.

The increased premium and new surcharge increased insurance premium income by about three creases in 2002. Aviation insurance premium totalled about $ 4 billion in 2001 as compared to around $ 1.2 billion in 2000 ( Shapiro, 2002 ) .

Aviation insurance companies justified the addition by stating that the industry had suffered on mean $ 1.7 billion loss each twelvemonth between 1992 and 2000 ( Shapiro, 2002 ) . In add-on to that insurance companies have to pay about $ 1.5 billion in disposal, re-insurance and higher keeping of primary insurance companies.

One alteration welcomed by the air hose industry is the better principle for pricing. Previously air power investment bankers traditionally calculated liability premium by the kilometers travelled by the aeroplane.

  • Indirect consequence of insurance industry on non-insurance industries

Sept. 11 onslaughts were likely the first insurance related event that had an impact beyond the straight related insurance sectors. It was expected that the onslaughts would take to increase in premium for commercial belongings and air hose insurance sectors. But the onslaughts put the focal point on all sectors / industries that are thought to be soft marks for terrorist onslaughts.

The rise in insurance hazard premiums were more in line with their hazard profile than any other factor. Natural terrorist onslaughts prone industries such as transportation, touristry and energy coevals workss have faced some of the highest additions in insurance premiums. Commercial belongings and liability insurance rose by about 30 per centum on norm in one twelvemonth after Sept. 11 onslaughts ( OECD, 2002 ) . “Target” constructions – those whose devastation can do multiplier consequence – such as chemical and power workss and high rise office edifices saw even steeper additions.

One thing to observe is that the addition in premiums came after decennary of diminution. Even though the premiums have increased considerable the mean insurance premium is still lower than the extremums seen in the decennary before Sept. 11 onslaughts. Though the mean insurance premium may still be lower than the degrees seen in 1993, the insurance premium rates for “target” industries have risen aggressively and therefore the rise might be skewed excessively unfavorably for them.

Reduced insurance coverage may impede the handiness of sufficient fiscal instruments to cover hazards associated with terrorist act. Lower investing and capital outgo may hold a negative impact on economic system.

Insurance industry took many stairss instantly to rectify the state of affairs caused by the Sept. 11 onslaughts. We saw above that insurance premiums were raised, hazards covered were reduced and many companies partly or to the full withdrew from the panic hazard insurance market.

The above immediate stairss did assist the insurance industry to increase capital and profitableness in the short term. But the inquiry looming is whether the insurance industry would be able to go on taking stairss to keep or increase its profitableness. And how the short term stairss would do in medium or long term.


We now look at the medium to long term effects of the Sept. 11 onslaughts. The major effects are:

  • Monetary value of insurance premiums

Post September 11, the net premiums in the US reinsurance industry increased by 14.1 per centum in 2002, a rate of growing non seen since 1986 ( Insurance Information Institute, 2002b ) . Lloyd ‘s mentioned in its 2001 Global Results pointed that early 2002 is seeing important betterment in concern conditions caused by higher demand and increased monetary values ( Lloyd ‘s, 2001 ) .

The cost of insurance monetary value dropped significantly in 1990s. The cost of hazard to concern dropped by 42 per centum between 1992 and 2000 ( Hartwig, 2002 ) . If we add in the affect of rising prices, the existent bead in insurance premium would be much more. So earlier or subsequently the insurance premiums had to increase. Insurance premiums besides had to lift due to increasing medical and legal costs.

The steep rise in insurance premiums attracted more capital to the insurance sector. In its Global Results for 2001, Lloyd ‘s pointed out that the influx of capital, particularly in Bermuda would decelerate down the addition in insurance premiums ( Lloyd ‘s, 2001 ) . It is hard to get away the cyclical nature of insurance sector. Increased capital will once more increase competition taking to regenerate monetary value competition in the average term.

General Accounting Office of US authorities besides pointed out that while there may be some illustrations of inordinate monetary value additions in the market, every bit long as insurance continues to be available, it is likely that competitory force per unit areas will finally rectify that job ( General Accounting Office ) .

Lloyd ‘s and US General Accounting Office ‘s appraisal of average term slower growing in insurance premiums was right. The US belongings and casualty insurance industry ‘s net written premium growing was merely 4.7 per centum in 2004 as compared to 9.8 per centum in 2003 ( Insurance Information Institute, 2004 ) .

  • Pricing of terrorist onslaughts

In Sept. 11 onslaughts, insurance companies lost to a great extent on life, edifice and aeroplane insurance at three different topographic points including one for two World Trade Centre towers. It is highly hard to monetary value the chance of multiple happenings for such events. But we are seeing more of such events and it was demonstrated once more in July 7, 2005 when four near coincident terrorist onslaughts shook London ‘s resistance and coach web.

It is hard to monetary value hazards related to terrorist act. Several factors contribute to this pricing riddle. First, terrorist onslaughts are really less in Numberss as compared to the frequence of other insured losingss. So there is deficiency of sufficient informations to pattern insurance premiums. Second of import thing is the possibility of many ruinous events happening at the same clip.

Since Sept. 11 onslaughts, universe has seen many more terrorist onslaughts. Though the losingss suffered there are non important to the graduated table of Sept. 11 devastation, yet the insurance industry is more cognizant of the graduated table of losingss. The lag in insurance premium growing indicates that the insurance industry is now pricing panic hazard more rationally.

  • Coverage

In a survey conducted by Joint Economic Committee of Congress, US on terrorist act insurance, the major determination was the limited market for terrorist act related insurance station Sept. 11. Re-insurers started excepting terrorist act from insurance policies in the beginning of Jan 2002. With no authorities aid, primary insurance companies were forced to except terrorist act related coverage from insurance policies excessively. US authorities shortly introduced Terrorism Act of 2002 to move as insurance company of last resort. Since so many primary insurance companies have re-started offering terrorist act insurance. But the market is non as broad and deep as it was before Sept. 11 onslaughts.

As re-insurers foremost excluded terrorist act screen, primary insurance companies limited the coverage. Initial coverage was limited to at most $ 150 million. The coverage was besides capable to higher deductible. Over clip the bound has increased but it is no where near the old coverage degrees.

Besides some companies are non composing panic insurance policies. Even the 1s who are composing panic policies are specifying bounds decently. It is improbable the commercial belongings and casualty insurance will of all time acquire the same panic hazard as was there before Sept. 11 onslaughts.

  • Increased hazard at primary insurance companies level

The higher reinsurance costs have lead many primary insurance companies to retain higher sums as reinsurance at lower degrees is now excessively high and economically unviable. Primary insurance companies are still composing panic hazard insurance policies but non taking reinsurance as the costs of high reinsurance do n’t warrant taking them. They besides want to maintain higher proportion of insurance premiums with them to pay for panic onslaughts. But non taking reinsurance has left them exposed to high costs if any major panic onslaughts take topographic point. There is a possibility of failure of such primary re-insurers.

  • Capacity

The capacity of the insurance industry is limited and as it has been demonstrated by the Sept. 11 onslaughts, the terrorist act related losingss could easy run into anything ruinous. The insurance industry has managed to last Sept. 11 onslaughts without much fiscal heebie-jeebiess. But a few more onslaughts of such graduated table can easy force a big figure of insurance companies into bankruptcy. This will hold an irreparable harm on non merely the fiscal wellness of insurance industry but besides on the general economic system and growing.

In June 2001, the sum claims paying ability of the belongings and casualty insurance industry was about $ 300 billion. The Sep 11 belongings and casualty losingss are about 10 per centum of the claim paying ability. Though the claims are to be paid over clip, yet the payout represent a important portion of the claim paying ability. We should besides except some classs like car and place from the entire belongings and casualty claim paying ability as the onslaughts marks were chiefly commercial belongings. The excess claim paying ability of the related insurance sectors was merely $ 100 billion before Sept. 11 and fell to $ 80 billion after the onslaughts ( Hartwig, 2002 ) .

The limited coverage with restrictive footings along with backdown of insurance companies from many markets meant that the insurance industry lost another $ 40 billion or so in capacity ( Hartwig, 2002 ) .

The debut of Terror Act 2002 by the US authorities increased investors ‘ assurance in the insurance industry. The measure brought back many insurance companies and hence increased the capacity. The addition in capacity slowed down the addition in insurance premiums.

  • Market perceptual experience

Stock markets are a good index of things to come. Fear of high Sept. 11 related claims led to dumping of insurance portions in the hebdomad after the Sept. 11 onslaughts. The insurance company portions fell by about 10 per centum in the first hebdomad of trading after Sept. 11 onslaughts ( Hartwig, 2002 ) . Investors were besides concerned about the possibility of more such big graduated table onslaughts. Warren Buffet mentioned that any atomic onslaught by terrorists can pass over out the whole insurance industry ( Hartwig, 2002 ) .

But the initial negative sentiment towards insurance portions shortly reversed into a positive mentality. The crisp addition in premiums made investors take a re-look at the medium and long term profitableness of the insurance industry. The positive mentality was besides strengthened by the fact that merely one re-insurer filed for bankruptcy.

Investors besides woke up to the thought of cut downing exposure and fastening underwriting criterions by the insurance industry. Who would n’t wish to put in an industry which is increasing the monetary value of its merchandises yet at the same clip offering less to its clients. It is a dual win state of affairs.

  • Role of authorities

Sept. 11 onslaught has besides established a closer relationship between the insurance industry and authoritiess. The US Senate passed the Terrorism Risk Insurance Act of 2002 on June 18, 2002. The US President signed the measure on Nov 26, 2002. The insurance act is about sharing of terrorist act related insurance losingss between insurance companies and the authorities. The insurance industry was asked to retain certain sums to run into terrorist act related claims. The authorities was moving as re-insurer of last resort and agreed to pay 80 per centum to 90 per centum of the losingss based on the sum of losingss. The US authorities besides capped its liability on all instances to $ 100 billion. The initial sharing understanding is for three old ages and the authorities will so reexamine the extension at that phase.

US authorities ‘s intercession to take hazard antecedently insured by the private sector was intended to be a short to medium term measure. It was a measure taken to reconstruct public assurance in concern.

It appears that the articulatio genus dork reaction of air power insurance companies in increasing premiums has driven concern out and brought authorities in. As air power insurance sector had made losingss in 8 out of 10 old ages prior to 2001, it was likely non the right insurance sector for private companies. Or is the authorities entry as insurance company of last resort in US was inevitable?

Airline industry was already staggering under heavy losingss due to post Sep 11 flight cancellations, lower ticket gross revenues and general hapless province of economic system. The high addition in premium made it really hard for them to last. US based air hoses have formed Equitime, a company incorporated to cover war and terrorist act hazards. Over clip it is expected to construct a capacity of $ 1.5 billion to supply coverage for war and terrorist act hazards. The US federal authorities will move as the insurance company of last resort.

US authorities helped in puting up of Equitime by vouching its function as insurance company of last resort. Prior to that, the US authorities had small or no function in private insurance market.

But the authoritiess across the universe, particularly in developed states, have been moving as re-insurer of last resort. And these are the states who have seen terrorist act related force in the yesteryear.

UK had been confronting IRA related terrorist onslaughts for decennaries. To take into history the potency of really high losingss the authorities set up Pool Reinsurance. Under this strategy, there is limited private screen with extra surplus screen for both belongings harm and concern break made available for companies who join Pool Re. The UK authorities Acts of the Apostless as re-insurer of last resort in instance of insolvency. In Israel, terrorist act hazard is excluded from standard policies. Israeli authorities covers terrorist act related belongings harm losingss.

Post Sep 11 onslaughts, France and Germany have besides set up province sponsored re-insurers for terrorist act related hazards. In instance of France, the rank of this re-insurer is mandatory for all members of Gallic insurance companies association. The UK authorities besides extended the terrorist act insurance screen for commercial belongings in 2002. The increased menace and frequence of large terrorist onslaughts makes it really hard for private insurance companies to cover all terrorist act hazards and authorities ‘s entry either as a re-insurer of last resort or pool supplier was inevitable.

Alan Greenspan said to the Joint Economic Committee of US Congress that in state of affairss of force, the viability of free markets may necessitate that the costs of insurance are borne by the taxpayer ( Hartwig, 2002 ) . So what was ab initio thought to be short or a average term step would likely go lasting. It is really hard for authoritiess to retreat support. Since many other states have non withdrawn such installation, US authorities would besides maintain it.

  • Consequence on little concerns

The smaller houses are besides experiencing the station Sept 11 insurance alterations. In UK, The Federation of Small Business has warned that surging insurance costs of obligatory employers ‘ liability insurance premiums are coercing many little houses out of concern. Small houses do n’t hold negociating power and are frequently squeezed by their bigger clients. They survive many times on tight borders and addition in insurance premiums may merely be the tipping point for some to shut concern ( Madslien, 2002 )

Insurance industry took immediate stairss after Sept. 11 onslaughts to keep its fiscal wellness. Many of those stairss have medium to long term effects on insurance industry. The industry has been plagued by cyclical nature of high and low insurance premiums and low and high combined ratios. The premiums increased after Sept. 11. But the rate of growing has slowed down in the last twelvemonth. The insurance industry mark of around 90 per centum combined ratio is still some distance but if it keeps increasing premium rates, even at a low rate, it might make at that place. The lone irritant in that accomplishment would be the industry itself, where low combined ratios pull in more capacity and higher competition lowers insurance premiums.

Section IV – Decision
Sept. 11, 2001 onslaughts were the biggest terrorist onslaughts of all time and open insurance industry to adult male made ruinous losingss. Terrorist onslaughts on Sept. 11 cost about $ 40 billion to the insurance industry and are about double the losingss from any event before that.

Insurance industry though covered panic hazard yet it was n’t either priced or was priced really less in the premiums. The loss faced by the commercial belongings insurance industry was about $ 10 billion and so was the loss in the concern break line.

Yet the insurance industry survived bankruptcies and assured the universe of its ability to pay claims. This was due to the planetary nature of re-insurance industry and sharing of hazards. Now more insurance companies and re-insurers are organizing pools to subvention insurance.

The industry took speedy stairss of restricting or retreating panic screen. It is non easy to monetary value panic and the easiest manner out was to halt panic screen. This left many concerns exposed to high hazard of panic. Over clip more insurance companies have started offering panic screen but have limited their range of losingss. This is one of the major impact of Sept. 11 onslaughts and it is improbable that the insurance industry will of all time offer pre Sept. 11 panic screen. It besides increased premiums to do up the losingss in the following few old ages. The addition was about 30 per centum on mean across most of insurance lines of concern. The premiums have been increasing since so and have resulted in some of the lowest combined ratios in the last 15 old ages.

But the enticement of higher premiums has brought in more capacity into the insurance market. This has once more increased competition and led to take down growing in insurance premiums. Insurance industry should seek non to once more fall into cyclical tendency of high and low premiums. It should larn the lesson now of now establishing its theoretical account on investing returns counterbalancing underwriting losingss.

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Insurance Information Institute ( 2002a ) . “The Long Shadow of September 11 – Impact & A ; Implication for Insurers and Reinsurers” , Insurance Information Institute,

Insurance Information Institute ( 2002b ) . “2002 – Year End Results” , Insurance Information Institute, hypertext transfer protocol: //

Insurance Information Institute ( 2004 ) . “2004 – Year End Results” , Insurance Information Institute,
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Lloyd ‘s ( 2001 ) . Global Results, 2001, hypertext transfer protocol: // ItemId=2416

Madslien, J. ( 2002 ) . BBC. hypertext transfer protocol: //

OECD ( 2002 ) . “Economic Consequences of Terrorism” ,

Shapiro, S. ( 2002 ) . “Aviation market ‘s Sept. 11 response debated” , Business Insurance, Chicago, Aug 5, 2002, Vol. 36

Slater, S. ( 2005 ) . “Catlin and Hiscox see Katrina loss but rates boost” ,, 12 September 2005

Williams, F. ( 2002 ) . “Attacks force insurance companies to rethink strategy” ,, Sep 10, 2002

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