HOME :
September 2001 • Volume 8, Issue 2
In this issue
World Trade Center Disaster Will Hit Insurers Hard
Insurance industry fallout from the terrorist attacks on the World Trade Center in New York and in Washington will be enormous, and will continue for a long time, industry observers said.
Joe Annotti, a spokesman for the National Association of Independent Insurers, said the disaster would have a huge impact on the insurance industry. "Someone commented, as they watched the towers collapse and the dust cloud billowing out from it, that that is what is going to happen to the insurance industry," he said.
Annotti said one of the biggest blows to the industry may fall on workers' compensation. "You have not only all of those workers in the towers, but thousands who worked in the immediate vicinity. You will see all those people who witnessed this unfold while at work. There will be a lot of stress claims."
Marlene Ibsen, a spokeswoman for Travelers Property and Casualty's office in Hartford, Conn., said she could not yet comment on the impact of the disaster. Travelers does not have an office presence in the lower Manhattan area where the twin towers of the World Trade Center collapsed after being hit by two planes.
Travelers' parent company, Citigroup (NYSE:C), is headquartered at 399 Park Avenue in Manhattan. Travelers is the largest writer of commercial multiple peril insurance in the state of New York.
Tom Mallin, president of the Property Loss Research Bureau, Downers Grove, Ill., an affiliate of the Alliance of American Insurers, said the first property coverage issue that will need to be resolved is the source of the attacks. "Most commercial policies exclude loss caused by war, including undeclared war, insurrections and other attacks authorized by recognized governments or de facto governments. The Palestinians, for example, would be a de facto government because there is no recognized nation that they represent."
"On the other hand, if the attack is the work of a single terrorist or an independent terrorist group, it is covered as a named peril such as vandalism, fire or explosion, in a typical commercial policy," he added. "The distinction between the two types of attacks can be murky, however. Proving the exclusion because of war is the burden of the insurance company. Even if President Bush declares a state of martial law, that does not necessarily mean there was an act of war. It may just be the best way to respond to the attack at this point."
Business interruption coverage will also be a big loser, Annotti said. "This area of New York is the nerve center for so much commercial activity. Goldman Sachs, for instance, had to shut down operations. They get all of their information and data services through the World Trade Center."
"Property losses, of course, will be enormous," he said. "But with property losses, there is a dollar amount that is the limit. So you can reasonably guess at the loss. With workers' comp, there is no limit."
The NAII itself had a presence in the World Trade Center, member company Scor Reinsurance Co. and subsidiaries General Security Indemnity and General Security Property and Casualty. There is no information yet on the fate of those employees, said Annotti. "We haven't gotten a word," he said, adding that he wasn't sure how many Scor employees there were. "It is a pretty substantial company."
An apparent terrorist attack on both buildings of the World Trade Center in lower Manhattan has spread chaos through the New York financial district, disrupting communications in the New York City area and leaving insurers based in other parts of the United States wondering what will happen next.
Minutes after two airplanes crashed into New York City's World Trade Center towers this morning, a large airplane-caused explosion and fire took place at the Pentagon. About 10 a.m., one of the 110-story World Trade Center towers collapsed, and the second tower collapsed about 30 minutes later. The fate of those in the twin skyscrapers wasn't immediately known. Authorities had been trying to evacuate the 50,000 people who work in the twin towers, but many were thought to be trapped.
The tragedies prompted officials, fearing still more attacks, to evacuate the Capitol, the White House, the State Department and other federal buildings, the Washington Post reported. Flights were canceled at all major airports in the nation.
Annotti said this disaster is different from others, such as hurricanes, in that insurers will not be able to get their catastrophe teams into the area immediately to begin assessing the damage and processing claims. "First, all the airplanes are grounded," he said. "Second, the entire area is a crime scene. They are not going to be able to get in there and get an assessment for a while."
The NAII predicts the disaster will mean heavy losses for insurers and reinsurers of the following:
- Airlines
- The World Trade Center and surrounding buildings
- Workers' compensation
- Automobiles hit by debris
- Business interruption
- Computers, furniture and other building contents
- Contingent business interruption for general interruption of commerce
- Potential liability for evacuation procedures.
Copyright © 2001 by A.M. Best Company, Inc. Reprinted with Permission
Identity theft
Privacy groups warn identity theft that might arise as a result of the September 11 terrorist attacks.
Identity theft is rapidly becoming an all too prevalent form of 21st-century terrorism. The Identity Theft Resource Center and the Privacy Rights Clearinghouse have issued a joint statement regarding potential identity theft that might arise as a result of the September 11 terrorist attacks. The organizations note that con artists may contact consumers regarding alleged damage to company databases and request critical personal information be provided to reconstruct the accounts. In addition it appears that numerous financial documents may have survived the disasters and could contain personal information which could be utilized in identity theft schemes. Almost every day we are asked to provide private information about ourselves. The first step toward taking control of our identity is to avoid giving away information, consciously or unconsciously.
- Be very careful how you dispose of unsolicited mail offering you "pre-approved" credit cards. You can minimize the number of these coming your way by sending a written request to each of the three national credit bureaus demanding to be removed from their marketing lists. They sell these lists to anyone and everyone, and you definitely do not want to participate in this profit center. To "opt out" of these pre-approved credit offers, call 1-888-5OPTOUT.
- While you're at it, ask each of the three credit bureaus--Equifax (800) 525-6285, TransUnion (800) 680-7289, and Experian (888) 397-3742--to send you a copy of your current credit report. The most this can cost you is $8 each. Keep these in a file and periodically have them updated.
- Be ever aware of the fact that the Internet is not secure unless you see a little closed padlock icon somewhere on your computer screen indicating that the area you are using is encrypted for security.
- Your analog cell phone is a security disaster. Digital phones are marginally better. Don't reveal anything over a cell phone that you wouldn't be willing to have printed on the front page of The New York Times.
- Foil those dumpster divers! Buy a shredder. Keep items with personal information in a safe place and shred them when you don't need them anymore. Make sure charge receipts, copies of credit applications, insurance forms, bank checks and statements, old expired charge cards, and those aforementioned credit offers you get
- Give out your Social Security number only when absolutely necessary. This is a serious and dangerous fraud, and if it happens to you, you're pretty much on your own to work out of the problems it can cause you.
- Carry as few credit cards and other pieces of personal information as possible, and if your I.D. or credit cards are lost or stolen, notify the creditors by phone immediately, and call the credit bureaus to ask them to flag your accounts and add a "victim's statement" and "fraud alert" to your file. Call your utilities, including your phone company. Tell them that someone may try to get new service using your identification. Report your missing driver's license to the department of motor vehicles.
- 8. If you feel an identity fraud has been perpetrated against you, call 1-877-FTC-HELP.
We've covered but a few of the many security risks to your identity in this short column. New ones are no doubt being contrived every day. But hopefully, these tips will raise your awareness of this pervasive problem so you'll more readily recognize potential perils and be able to take steps to avoid becoming another victim of identity thieves.
Market & Financial Survey Results
Note: This article was written before the terrorists' attacks. It is important to note that industry experts were predicting a hardening of the insurance market bedore the tragic events of September 11th.
The property-casualty insurance industry, particularly in commercial lines, has historically been cyclical in nature with swings in profit and loss being accompanied by similar fluctuations in the competitive pricing structure of insurance carriers. The full cycle from soft to hard market and back again had previously lasted no more than seven years but the industry has been faced with soft market conditions for almost thirteen years.
At the beginning of 1999 some industry observers were predicting the end of the soft market. According to them there could be a significant increase in premiums on commercial renewals by the year 2000. There was a noticeable shift in the market during the second half of 1999 and the deteriorating financial performance of many large insurance carriers dictated come dramatic changes in renewal pricing throughout this past year. Some insurance companies were refusing to reduce premiums further and were actually willing to walk away from risks that did not fit their profile. By the end of the 2000 year rate reductions were gone and many renewals were being written at 20% to 30% increases. Insurance company management teams were beginning to feel the pain and to react after lackluster earnings reports for the past year.
Some industry experts wonder whether there are enough experienced underwriters to pull off a real turnabout and many believe that an abrupt end of the soft market (like the turn that occurred in the mid eighties) is not imminent. Whatever hardening there is will only last several years. During the period from 1990 through 1998 the average rate of growth in commercial premiums was 1.4% while surplus was increasing at an average rate of 12% per year. Total industry premiums grew 5.1% in 2000 which is an indication that there has been some rate relief. The average annual growth rate in net written premiums for the past five years has been only 3.7% and the growth rate has been below 10% in every year since 1987. Premium increases in 1998 and 1999 were less than 2%, the smallest rate of growth since the Second World War.
Surplus went down in 2000 for the first time since the early eighties. There still remains a tremendous amount of over capitalization in the industry, which is estimated to be around $70 billion. Many observers believe that this capacity problem is still the most serious problem facing the property-casualty industry. The premium to surplus ration is only 1.25:1, leaving companies with twice as much capacity as they are currently using. With that much capital available and with the reinsurance market willing to assume almost any risk, there will be many insurance companies and alternative markets willing to write the underpriced business that some carriers may relinquish. This hard market is being driven by voluntary discipline on the part of underwriters and is not a result of surplus deficiencies. There is also the problem with consumers' reluctance to accept tremendous rate hikes that will keep the cycle form being as extreme as it's been previously.
There can be no doubt, though, that insurance company results are continuing to deteriorate. Losses were average for 1999 and even below average for 2000 but premium have been too low to cover them. The combined ratio was 107.8% in 1999 and close to 110.5% for 2000. (The Combined Ratio is the sum of the Loss Ratio, Expense Ratio and the Policyholder Dividend Ratio. This ratio measures a company's overall underwriting profitability. This ratio does not reflect investment income or income taxes. A combined ratio of less than 100 indicates the company has reported an underwriting profit. Generally, the acceptable range for this test is from 95 to 105 for property insurers, and from 100 to 110 for casualty insurers.) According to ISO it appears as though this ratio might be closed to 115% for 2001 and could hit an all time high of 139.6% five years from now. Property-casualty earning dropped 7.5% in 2000 and surplus was down for the first time since 1984.
The Insurance Company Response….
As I write this on September 25, 2001, the insurance press is uniform in stating the affected insurance companies will not apply any war exclusions
Our real fear at this time is the availability of reinsurance and the effect on future renewals.
Insurers are reluctant to talk about how the World Trade Center attacks will affect premium rates, but industry watchers say the impact will be dramatic. Industry experts predict that the market will tighten for large, well-capitalized reinsurers, but a number of smaller companies will be hard hit. It is likely that financial weaknesses in many companies will eventually emerge.
One analyst predicts a 15% to 20% rate increase for property coverage, and 10% to 20% for other commercial lines, such as workers' compensation, liability and business interruption. Aviation coverage will see the most effects with premium increases of 100%, 200%, and even 300%.
Likewise, analysts believe the terms and conditions will be much tighter as well. Price, availability and terms of coverage all will be examined closely, and changes will be seen in many lines according to Robert Hartwig, chief economist for the Insurance Information Institute.
Aiding the Investigators:
What the Right to Financial Privacy Act Allows You to Do
As a result of the tragic events of September 11, various federal agencies are working around the clock to identify and prosecute those who are responsible. Important information or evidence may be contained in the financial records of certain individuals and the authorities will be seeking those records. The purpose of this article is for financial institutions to understand both the circumstances under which they can volunteer information about customer financial records to federal government authorities, and the procedures and requirements that apply when the federal government authorities are requesting customer financial information.
Understanding the Law That Applies
The federal Right to Financial Privacy Act (RFPA) governs the release of customer financial information to federal government authorities. Generally, the customer must receive notice prior to the release of the information so the customer has an opportunity to challenge the release. However, there are several important exceptions, three of which are particularly pertinent in the aftermath of the terrorist attacks.
1. Voluntary disclosure by a financial institution.
Section 3403(c) states that a financial institution or its officer, employee, or agent may notify a government authority of the existence of information which may be relevant to a possible violation of any statute or regulation. In this instance, plotting to commit terrorist attacks would be the violation at issue. If you have information you believe would be relevant to the investigation, you may rely upon this section of the law to notify government authorities.
Understand, however, that this is a very limited exception to the RFPA. No records can be released under this exception. The information you can disclose may only include the name or other identifying information of the individual, corporation, or account involved and the nature of the suspected illegal activity.
2. Disclosure pursuant to request by a government authority conducting foreign intelligence activities
Section 3414(a) permits the production of customer financial records pursuant to a request from a government authority authorized to conduct foreign intelligence activities. If the FBI is making a request for customer financial information as a result of its role in investigating foreign intelligence, it is permissible to turn over the information to them without complying with the notice provisions of the RFPA. It is imperative that you ask for and receive a certificate of compliance with the RFPA from the government authority in this type of situation. The financial institution is protected from liability if it provides customer information in good faith reliance after receipt of a certificate of compliance.
In addition, Section 3414(b)(5) of RFPA requires a financial institution, its officers, employees or agents comply with a request for financial records made by the FBI when the FBI Director certifies in writing that the records are sought for foreign counterintelligence purposes and that there are specific and articulable facts giving reason to believe that the customer or entity whose records are sought is a foreign power or an agent of a foreign power.
3. Disclosure required due to imminent danger
Section 3414(b) provides that a federal government authority may obtain financial records under this exemption if the authority determines that a delay in obtaining the records would create imminent danger of:
(A) physical injury to any person:
(B) serious property damage; or
(C) flight to avoid prosecution.
As with the foreign intelligence exception, the government authority seeking the financial records to prevent imminent danger is required to provide the financial institution with a written certificate signed by a supervisory official that the authority has complied with the applicable provisions of RFPA. See Section 3403(b) for the details.
When information is requested under the foreign intelligence or imminent danger exceptions, there does not seem to be any requirement that the records request be in a particular form. In other words, it would not necessarily have to be a subpoena, summons, or search warrant. It could even be an oral request. As long as you receive a certificate of compliance from the appropriate official, you can turn over the information and records, and you should do so in an expeditious manner.
These are difficult and confusing times, but we hope that these guidelines will help you assist the government in its difficult task while shielding your institution from liability. This is something you should discuss with your legal counsel now – rather than later – and formulate a policy.
Small Business Resources Help in Disaster Recovery
Disaster can strike a community at any time. Whether it is due to natural causes, like a flood or earthquake, or unnatural causes, like a terrorist attack, the end result is the same. A disaster leaves destruction in its wake, with devastated survivors left to pick up the pieces.
No matter how bad things get, however, a disaster always strikes a small business owner hardest. In addition to personal losses, a small business owner often loses the business itself. These casualty losses translate into lost business investments, lost income and a severely decreased ability to recover from the disaster. If employees are involved, their future also will depend on the small business owner's ability to get the business back on its feet.
Hopefully when a disaster strikes your business, you are prepared to deal with the situation. Before that fateful day, you should have spent some time planning and developing a contingency plan for your business. You also should have researched the various types of insurance out there that you are properly covered.
If you are unfortunate enough to have suffered from a disaster recently and even more unfortunate enough to fall short on recovery resources, don't worry. All is not lost. In addition to various state and local economic development programs, the federal government offers relief to disaster victims, including small business owners, through various sources. These sources include:
- Small Business Administration (SBA)
- Federal Emergency Management Agency (FEMA)
- Internal Revenue Service (IRS)
- U.S. Department of Agriculture (USDA)
- Department of Housing and Urban Development (HUD)
The top three sources are examined below.
- SBA
- The SBA plays a major role in providing disaster relief. Its disaster loan program is the primary form of federal assistance for private sector disaster losses. The three types of SBA loans available are:
- Home disaster loans -- Loans are provided to homeowners or renters to repair or replace disaster damages to real estate or personal property.
- Business physical disaster loans -- Businesses of any size may receive loans to repair or replace damaged business property, including real estate, machinery, equipment, inventory and supplies. Non-profit organizations are also eligible for this relief.
- Economic injury disaster loans -- Low-interest loans for working capital are available to assist small businesses and agricultural cooperatives through the disaster recovery period. The only catch is that the loan applicant must not have any credit available elsewhere, except from government sources.
- FEMA
- This federal agency reports directly to the president and coordinates the efforts of other federal agencies in a number of emergency management related activities. In addition to providing disaster assistance information, the FEMA web site (www.fema.gov) provides useful contact information and links to help you deal with disasters before and after they happen.
- IRS
The IRS is designed to sometimes give back, not just always take, your money. Of course, the IRS doesn't do this out of the goodness of its heart, assuming it has one. Instead, Congress has passed a number of amendments to the tax code that provide breaks to disaster victims.
An important example is the tax election that allows a taxpayer in a presidentially declared disaster area to claim disaster losses in the tax year before the year of loss. This allows some quick relief by recognizing the losses earlier rather than later.
So whether you are a small business owner located in the war-torn areas of New York City or on the flood-ravaged Mississippi River, don't lose hope. There are many resources available to help you put the pieces of your life and business back together again. The only thing that you need supply is the willingness and determination to try. Our hearts and our prayers go out to the individuals and families affected by the tragic attacks on the people of the United States.
In Memoriam
No one knows, or will ever know, the final tally from the horror of September 11th. Hundreds of insurance professionals have lost their lives in the attack on the World Trade Center Complex.
- AON Group reports that 200 of its 1,100 employees in the WTC are still missing
- Marsh Mac's world headquarters took a direct hit from the jetliner and exploded on impact. 315 of the 1,900 employees in its offices remain missing
- There is little information on employees of the nearly two dozen other industry firms with offices in the WTC (including AIG Aviation Brokerage, Allstate, Fireman's Fund, John Hancock, Mutual Life and MetLife.)
# # #
SOLUTIONS is a service of The McLaughlin Company and Creative Risk Management, Inc.—offering you timely and creative solutions to all your INSURANCE and RISK MANAGEMENT needs.
THE McLAUGHLIN COMPANY
CREATIVE RISK MANAGEMENT, INC.
1725 DeSales Street, NW
Washington DC 20036
Fax 202-857-8355 - 800-233-2258 - 202-293-5566
