Download Effects of 9/11 on Insurance

Effects of 9/11 on Insurance
September 11, 2001 is known as the day when the biggest and most complex insurance
catastrophe occurred. The attack at the World Trade Center in lower Manhattan affected many areas
in the insurance market. Increased premiums, terrorism coverage requirements, the Terrorism Risk
Insurance Act of 2002, (TRIA) and economic consequences to the insurance market are the areas that
this paper discusses.
Insurance companies can and usually have been able to assess the amount of insurance risk
that is involved in a certain situation. These risks include everything such as natural disasters,
hurricanes, tornadoes, fires, floods, and death. Prior to 9/11, coverage for losses due to terrorist attacks
was not an item that was excluded from insurance policies. At the present time losses due to terrorism
are being excluded. Particularly areas that are vulnerable like airports, large office towers, Jewish
charity buildings, and bridges such as the Golden Gate Bridge. One of the problems that arouses from
this terrorism issue is, how are insurance companies supposed to rate for terrorism? Past knowledge
has been collected and has been used in studies determining future rates and premiums. Predictions
can actually be made and trends set these premiums for insurance coverage. On the other hand,
insurers have no data or averages calculated to determine future terrorist activity it’s unattainable.
After 9-11 there have been many issues businesses face regarding insurance. For businesses
that have many property exposures, or are considered an at risk target for possible terrorism; will see a
huge reduction in available coverage and high increases for what they can find. The underwriting
standards are becoming incredibly tight. You can expect a reduction in capacity and new restrictions
on coverage by reinsures. Looking into the future there will be more of an effect than the tightening
markets and decreased capacity. Insurers are excluding terrorist acts from coverage and also
increasing coverage restrictions, making it very hard for commercial building to gain insurance or
companies wanting to build to gain insurance. This could slow down economic growth and ruin many
contractual agreements that had previously been agreed upon. Insurance companies and reinsures
also will face insolvency problems should an event like this happen again and there is no form of
government backing or subsidy, and many litigation disputes arise from a situation like 9-11 making
costs increase even more for the insurers.
September 11th has become a huge impact on the way that corporations and small businesses function.
These companies now find themselves either paying extremely high premiums on the insurance or not
being able to get insurance that covers terrorism. These facts can be harmful for a business that needs
to buy new equipment that will have to have insurance on it. In some cases it will cause the business
that is trying to expand too much money to be economically feasible. The raise in insurance prices for
corporations has also passes on the expense to the consumers. To offset the insurance premiums
consumers are forced to pay higher prices.
In 2002, President Bush signed into law the Terrorism Risk Insurance Act. This act
established a temporary terrorism risk insurance program under which the government will share the
risk of insured loss from certified acts of terrorism with commercial property and casualty insurers
until December 31, 2005. Insurers assume 10 percent of the losses, while the government assumes the
remaining 90 percent, up the liability cap of $100 billion. There are three main limitations involved
with this act. First, the act of terrorism has to occur on U.S. land. Another limitation is that the
terrorism act has to have been committed by a foreign interest or person to be covered, and finally, if
war is declared, then the government does not have to pay losses.