Insurance Sectors Realizing Effects of Sept. 11
Staggering Losses Drive Industry to Limit Risks, Hike Premiums
BY MITCHELL L. LATHROP
Special to the Business Journal
It’s been five months since the terrorist attacks, and we are just beginning to realize the financial ramifications.
In fact, we won’t know for years the total monetary loss. Currently, speculative estimates place the loss at anywhere from $40 billion to $100 billion.
Since Sept. 11, the two sectors of the insurance industry have been thrust to the forefront of attention , insurance companies and reinsurance companies , comprised of the insurers of the insurance industry. Since Sept. 11, not only have America’s insurance and reinsurance companies suffered considerable financial losses, both sectors are suffering globally.
In response to extensive losses, companies are raising their rates and excluding acts of terrorism clauses in policies, in general, and many in addition are not renewing or limiting policies. Limited coverage policies are the initial concern, leaving risks above the available insurance limits without coverage.
In time, the losses suffered by the insurance industry will affect our entire economy.
Even with the U.S. government passing a statute capping the amount of monies insurance and reinsurance companies are responsible to cover, in reference to Sept. 11, the staggering losses cannot possibly be recouped by the industry, as it currently is structured, by ways other than the increase of premiums and the limitation of risk.
– Financial Spillover
The tragedy of Sept. 11 filters down to layers no one could ever anticipated. A small sampling of the types of coverage immediately impacted is life, property, accident, business interruption, liability, health, auto, aircraft and hull insurance. While insurance and reinsurance companies are paying their losses, they are also depleting their reserves.
The fortunate insurance companies that are not forced into bankruptcy will need to rebuild their reserves by raising their rates and or premiums. Already, many insurance rates have increased since Sept. 11.
San Diegans can expect to see their insurance premiums soar for health, automobile, property, life and homeowners insurance, to name a few.
Commercial real estate owners, as well as business community, will also feel the effects of higher insurance rates. San Diego’s commercial building owners are expected to see their rates double when renewing their insurance policies in 2002. With rates rising for commercial real estate owners, lease and sublease rates ultimately will be affected. Some tenants may have to consider raising costs of products and or services to compensate for their increase in overhead.
In an effort to save money, companies will need to begin asking themselves, how much money they can afford to lose before making decisions to purchase certain types of coverage.
– Clamor For Change
Currently, Congress is hearing testimony regarding insurance misconduct. Consumers are beginning to complain about the hefty increases in insurance costs, while insurance companies are blaming both the acts of terrorism and the increases on their need to recover the losses they confronted since Sept. 11.
Even as the industry is being scrutinized, there are positive effects on the industry as a whole.
– Public awareness regarding insurance has dramatically increased.
– New companies are entering the insurance market. Since these companies are starting with clean slates and without any claims or liabilities, they can stimulate relatively competitive pricing.
It is impossible for a capitalist society such as America’s to survive without insurance. With the industry under fire and undergoing drastic changes in reference to regulations and restructuring, it is impossible to estimate either how long it will take national and international insurance and reinsurance industries to recover from Sept. 11, or, for that matter, the overall structure of the “recovered” industries.
Lathrop is a partner in the insurance and reinsurance group of Luce, Forward, Hamilton & Scripps, LLP in the San Diego office.
