Fri, Sep 14, 2001 page24

• World Business: Terrorist attacks to transform insurance industry worldwide

  • REUTERS
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  Businesses look set to pay more for insurance worldwide next year as insurance companies wake up to a new world of a US vulnerable to terror attacks.

  The catastrophe of hijacked aircraft ploughing into the World Trade Center and Pentagon on Tuesday, possibly killing thousands of people, could cost the world's insurers billions of dollars -- prompting them to hike rates to claw back losses.

  Businesses might in future have to dig deeper into their pockets to buy specialized cover against such attacks, which only a few large reinsurers have the capacity to underwrite.

  "Clearly we have a new risk which the world thought impossible," said Carsten Zielke, insurance analyst at investment bank WestLB Panmure. "Now we have this risk to such an extent that everybody is afraid of it. Therefore a new product is going to be created to cover this."

  In Britain, where there have been bomb attacks by Irish nationalists over many years, general property and casualty policies typically exclude damage from terror attacks. But this has not been the case in the US, where aviation insurance includes cover for war and terrorism.

  Now insurers will want to exclude those risks from policies -- or offer separate cover at a high price.

  Insurance premiums are already rising by between 20 to 30 percent on all fronts, as insurers make up for huge claims from natural disasters in recent years, including storms in Europe in 1999 and reinsurance failures in Australia.

  Now these could even higher, especially in property and casualty liability, mortality and business failures.

  The world's major reinsurers were in the throes of negotiating contracts for the coming year when the US attacks happened and they are now likely press for higher rates.

  "As we look out to the end of the year, reinsurers will be looking more aggressively to be putting prices up than they would have done at the beginning of the week," said William Hawkins, insurance analyst at brokerage Fox-Pitt, Kelton.

  Ratings agency Moody's estimated the insurance cost could reach US$10 billion to US$15 billion, approaching the US$20 billion bill from the world's most expensive natural disaster, 1992's Hurricane Andrew.

  Losses are likely to be shared by US and leading international insurers and reinsurers, which are concentrated in London, continental Europe and Bermuda.

  Analysts said some smaller reinsurers could struggle under the weight of the claims, forcing the biggest players, such as Lloyd's of London, Munich Re and Swiss Re to pay for those claims as well as their own.

  "There is going to be a massive shortfall of reinsurance capacity in the short term. The capacity that is available will command an extremely high price," said Nicholas Johnson, an insurance analyst at specialist investment bank Numis.

  Insurance experts said Tuesday's attacks should theoretically be covered under aircraft insurance, although it is not known whether this would be enough to pay for the liabilities, including loss of life.

  WestLB analysts said in a note the potential for a catastrophic loss in life insurance should not be dismissed.

  WestLB's Zielke argued that the US government could be financially liable if a state of emergency is declared. Even if that did not happen, reinsurers could still claw back some losses from the government, as it is ultimately responsible for flight security both in the air and on the ground.

  Dominic Skeet, director at credit ratings agency Standard & Poor's, said governments might need to step in because demand for such cover would outstrip supply.

  "There has to be a solution found such that cover is available for those who need it," Skeet said. "That may have to ultimately involve some kind of state involvement."
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