Insurers Risk Insolvency if Claims Top $50 Billion

Some insurers could face insolvency if claims from last week’s terrorist attacks spiral above $50 billion or if another disaster such as a big hurricane or earthquake increases the industry’s losses, a major insurance rating agency said Friday.

Insurers have more than enough capital to cover the $19.2 billion in reported losses, but “we fully expect that number to grow significantly,” said Mark Puccia, managing director of financial services for Standard & Poor’s Ratings Services.

“If you look at prior catastrophes like Hurricane Andrew, it’s quite common for estimates to come out at one dollar figure and then double or even triple,” Puccia said.

In a White House meeting Friday, insurance leaders told President Bush their industry is in good shape to pay all claims from the World Trade Center disaster, but they may need the government to share the cost of any further terror attacks.

“The insurance industry is very safe. The insurance industry is well capitalized,” Maurice Greenberg, chairman of American International Group Inc., said after the meeting.

S&P;’s Puccia said it was far too early to tell how high insured losses from last week’s attacks would climb, although the “vast majority” of claims are expected to be made or estimated by the end of the year. Other analysts have estimated claims could reach $30 billion to $70 billion.

S&P; on Thursday downgraded two major insurers, Lloyd’s of London and Zurich Insurance Co., and warned it might downgrade 15 other insurers soon because of “catastrophic” losses from the World Trade Center attacks.

The analysts emphasized that the companies are “extremely well capitalized” and able to remain solvent even if insured losses more than double from current estimates.

But insured losses in excess of $50 billion--whether stemming from the attacks or from any additional disasters--could pose a threat to some companies’ solvency, Puccia said. He declined to specify which companies could suffer, although major insurers such as Munich Re and Berkshire Hathaway have estimated their losses at more than $2 billion each. Other insurers such as AIG and Chubb Corp. also have announced large estimated losses from the attacks.

“To the extent that there’s another major catastrophe, there would be many of the same companies with exposure to the World Trade Center that would insure that [new] event,” Puccia said.

Despite the potential loss of more than 6,000 lives--many of them highly paid executives--life insurance costs from the disaster are expected to constitute less than 12% of overall losses, analysts said.

The American Council of Life Insurers said the number of claims is “well within the industry’s ability to pay.” Insurers are working with New York regulators to devise affidavits that can be used in place of death certificates to file life insurance claims. Otherwise, many beneficiaries would have to wait months for official death certificates as rescuers sift through rubble and try to identify remains.

Insurance analysts and companies said business interruption costs are one of the biggest unknowns in calculating potential insurance losses. How much insurers will pay depends on how the policies are written and interpreted by the companies--and, most likely, by the courts as policyholders battle over claims.

Insurers are expected to recoup at least some of their losses in the form of higher rates, much like those that followed Hurricane Andrew, which until now was the largest disaster with insured losses of $19 billion.

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Reuters was used in compiling this report.