Placing a High Premium on Fear

Terrorists did more than bring down the twin towers of the World Trade Center on Sept. 11, 2001. They also toppled a key pillar of the national economy: the insurance industry.

Last week, Congress came to the rescue by passing legislation that places a limit on how much insurers have to pay on future terrorist incidents. The bill, which President Bush is expected to sign shortly, is designed to protect companies from disastrous losses and enable them to resume writing insurance against terrorism risks.

Given that many of the insurance industry’s troubles were of its own making, it’s understandable that consumer and taxpayer groups in Washington have criticized the legislation as a “bailout” for the politically powerful.

But “necessary evil” would be a more accurate term.


Truth is, since the attack on the World Trade Center, the resulting scarcity of terrorism insurance has caused real distress for everyone from developers to contractors to building owners to high-rise tenants. Few in the public at large paid attention to that distress, but then who focuses much on insurance?

“People think insurance is boring, but it is so fundamental to the economy,” says Janet Jones, president of Elkins/Jones, a large Santa Monica-based insurance brokerage firm.

The 3,200 companies that peddle property and casualty insurance, taking in $300 billion in premiums each year, provide the protective shield on which the commercial world depends. Simply put, nothing gets erected without insurance.

The insurance industry already was hurting when the terrorists struck.

Most companies had slashed premiums during the 1990s, seeking to increase their share of business and attract money that could then be invested in stocks and bonds. But the bull market ended, and company investment gains shrank just as underwriting losses mounted.

Suddenly, premiums proved inadequate to cover rising damage claims for a variety of hazards. Included in the litany: asbestos, “killer mold,” tornadoes, hurricanes and earthquakes.

Then came the horror of Sept. 11.

Insurance companies have stepped up to pay claims that so far total $50 billion and certainly will go higher. Yet they have shied away from underwriting new policies against future episodes of terrorism.


Many reinsurance companies -- those that back up primary insurers by covering the highest levels of risk -- also have refused to cover terrorism because they could find no precedent for the Sept. 11 tragedy, no grounds for calculating the odds.

“They feared that the risk was more than they could ever dream about,” says Edward Abbott, chairman of Abacus Capital, a real estate investment firm based in Miami.

But at the same time, banks and other lenders have been demanding that real estate interests buy terrorism insurance. In turn, property owners have found themselves in a terrible squeeze.

In the end, only a relative few firms -- including American International Group Inc., the Lloyds of London pool of underwriters and smallish Ace Ltd. of Bermuda -- have continued to write terrorism coverage. And their offerings are hugely expensive. Premiums run nearly $1.5 million to cover a $20-million office building, compared with conventional insurance charges of $200,000.


The higher rates even have trickled down to homeowners. Their insurance bills are expected to rise an average of 9% next year on top of an 8% increase this year. Through the 1990s, by comparison, homeowners’ insurance rose about 3% annually.

Everyone with property is “affected by the increased cost of reinsurance generally,” explains Marcia Salkin, a government affairs official at the National Assn. of Realtors in Washington. “Ultimately, we are all dependent on the financial stability of the insurance industry.”

Will the new law deliver? Probably.

The legislation creates a three-year, $100-billion program under which the government will cover 90% of terrorism-related losses after insurance companies pay an initial amount. Insurers will be responsible for the remaining 10%.


The industry will be required to repay the government -- through a surcharge on commercial policyholders -- for payments up to $10 billion in the first year, $12.5 billion in the second year and $15 billion in the third year.

The law also requires that practically all property-insurance companies offer terrorism coverage, so the very numbers of additional firms in the market should push rates down.

“Things could get cheaper,” says Michael Biletski, a managing director of Aon Corp., a large Chicago-based insurance brokerage and services firm. After all, one way companies may compete for business is “by quoting low premiums.”

Longer term, the industry’s specialized think tanks -- such as Applied Insurance Resources of Boston -- are likely to devise sophisticated calculations of terrorism risks, just as they have done for hurricanes and earthquakes. Such financial models are based on loss histories and advice from experts in Britain and Israel, countries all too familiar with terrorists’ bombs.


The need for terrorism insurance is, in many ways, a sad

reflection on the times in which we live. But it is a need nonetheless.


James Flanigan can be reached at