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When Hurricane Andrew ripped through South Florida in August, 1992, it was a sobering reminder of the human and the financial price Mother Nature could exact. Now Andrew has a ghastly rival. As people registered the shock of Tuesday's destruction in New York and Washington, whispers began within insurance circles that the attacks might cost insurers as much as $30 billion.
Until now, Andrew's $16 billion tab was the most expensive U.S. insurance event ever. "This is catastrophic beyond anything we've ever seen in the U.S.," says Jason B. Adkins, a partner in Adkins, Kelston & Zavez, a Boston law firm that specializes in insurance litigation.
SHARED RISK. The insurance bill will far surpass the record for a man-made catastrophe, the $775 million loss from the Los Angeles riots, also in '92. Certainly, the insurers in this case have spread their risk. "Insurers don't even insure an aircraft alone," says Robert P. Hartwig, chief economist at the Insurance Information Institute in New York. The American Insurance Assn., a trade association of large commercial insurers, expects that almost all of the major U.S. companies will have some losses.
Industry experts estimate that hundreds of insurers around the globe share the risk in this case, though it's unclear whether, after the 1993 bombing of the World Trade Center that cost insurers $510 million, the new policies covered terrorism differently from other risks.
Even if some terrorism exclusions are in place, it's clear that there will be billions in losses for the industry. Already European reinsurers, companies that insure other insurance companies, have begun to calculate their exposure to the building damage, claims for injured workers, lost business income, and the cost of temporary relocation.
Giant Munich Reinsurance has put its exposure at $907 million, a number the company says would severely hurt profits. Its stock fell sharply along with those of Swiss Reinsurance and Allianz the day of the attack. Stocks of American insurers were expected to be down sharply when U.S. trading resumed. Berkshire Hathaway alone expects to shoulder 3% to 5% of the cost.
PREMIUM PRICES. Some firms are likely to face bankruptcy, particularly smaller reinsurers that might have taken on more risk than they can pay for. "I'm sure there will be some carriers who won't be able to withstand the loss they're exposed to," says Matthew C. Mosher, group vice-president for A.M. Best Co., the insurance-rating firm.
Property and casualty rates are sure to rise. Since Andrew, they have jumped by 250% in Miami and by 110% in all of Florida. Analyst Ira L.Zuckerman of Nutmeg Securities Ltd. expects to see a similar increase in reinsurance pricing now. The largest U.S. insurers, Allstate Corp. and State Farm, are less likely to be affected, as they do not specialize in commercial insurance. Instead, observers worry about commercial specialists such as American International Group Inc. and Loews Corp.'s CNA Financial unit.
AIG Chairman M.R. Greenberg said in a statement: "Our total losses stemming from this tragedy will not impact our solid financial condition." CNA said its exposure was "under review." The greatest risk may be facing companies that cover health costs, life, and workers' compensation. Unlike property insurers who face a maximum replacement cost, workers' comp and health insurers face potentially unlimited costs, and claims that will extend beyond the tenants of the Trade Center.
DOUBLE BLOW. This is of special concern in the case of workers' insurance. That industry has already been experiencing a dangerously high level of insolvencies and sharply reduced earnings, says insurance-rating firm Weiss Ratings Inc. The biggest New York writers of workers' comp are AIG and Liberty Mutual.
So a disaster like this one is likely to have a winnowing effect. After Hurricane Andrew, A.M. Best lowered its ratings of 31 of the 230 companies most exposed, and several small ones failed. But those that didn't saw premiums -- and their stock prices -- climb. "This is kind of a sick industry in that regard," says Best's Mosher. For insurers and their customers, the dust has only begun to settle.
By Nanette Byrnes, with Diane Brady in New York, Pallavi Gogoi in Chicago, Kerry Capell in London, and David Fairlamb in Frankfurt
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