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These are staggering sums. To put the magnitude of this event into some perspective, the largest insured loss in the United States from a single event in history prior to September 11 was caused by Hurricane Andrew, which slammed into South Florida in 1992. Insured losses from Andrew, adjusted for inflation, approached $20 billion. Most of the Andrew claims, moreover, were concentrated in the homeowners market. The September 11 attacks will represent the single largest loss from a single event for a number of coverages, including property, business contents, business interruption, workers compensation and life insurance, among others. Fortunately the insurance companies with the greatest loss exposure have sufficient capacity to pay all claims currently anticipated. These claims will be paid, however, in spite of the fact that most insurance companies did not collect a single dollar in premium for potential losses due to an act of terror. There are a number of explanations for this, but essentially the insurance industry did not consider the potential risk of significant loss due to an act of terror on U.S. soil should be a factor in their premium calculations. The insurance industry is paying a heavy price for its failure to understand the risk environment for the various properties, businesses and lives that it insured.
Adapting Insurance to the Risks Going forward, the attacks have forced the insurance industry to reconsider how they evaluate particular commercial risks. Put bluntly, a number of office buildings, other commercial structures and businesses must now be evaluated on the basis of their being a target for acts of terror in addition to the other, more traditional risk factors. Further, even some of the traditional tools used for evaluating risk need to be reconsidered. For example, it is a generally accepted underwriting principle in some lines of insurance to avoid over-concentration of similar risks within a confined geographic area. Writers of homeowners insurance, for instance, are careful not to insure too many homes in a single neighborhood or zip code. In this way they avoid overexposure to risks such as fire and natural catastrophe. One of the problems discovered after Andrew was that a number of companies had over-concentrations of insured homes in neighborhoods and other localized areas that were most severely hit by the storm. Prior to September 11, however, geographic concentration was not as much a concern in a number of commercial coverages such as workers compensation, or group life and disability. The methodology for evaluating these risks did not consider the complete and sudden destruction of multiple businesses located in a single office building or on a city block, and the
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death or serious injury to large numbers of the employees in these businesses. Many businesses in the World Trade Center, for example, shared the same insurance companies for their various business coverages. In the aftermath of the attacks, commercial insurers will need to revise their underwriting criteria to consider the impact of the total destruction of office buildings and other large commercial structures. The additional costs associated with insuring these risks will be passed on to buyers of insurance. Finally, the events of September 11 have altered previous notions of the significance of the commercial and life insurance industry to the country. The commercial insurance market is an essential component of our nation’s economy. Every business in the nation requires access to a healthy insurance market capable of accepting both their ordinary and extraordinary business risks. This new awareness may result in rethinking the manner in which the commercial insurance industry is operated and even regulated. Life insurers have once again proven themselves to be indispensable in ensuring the continued financial viability of families following the death of a loved one and significant provider. The industry as a whole has performed admirably in the aftermath of September 11. However, the real challenges are just beginning as insurance companies struggle to adapt to our new world.
Scott graduated from Suffolk University Law School in 1986. He is a partner at KPMG LLP, an international accounting and advisory services firm and leads the firm’s national insurance regulatory practice. He previously served as deputy superintendent of insurance for the State of New York and as deputy commissioner of insurance for the State of Delaware. While he was at Gordon, Scott was president of the student government association 1980–81 and participated in a number of intramural sports. He is married to Karen (Barlow) Harrison, also a 1981 Gordon graduate. Karen, a former teacher, stays at home with their three children, Nathaniel (14), Caitlyn (11) and Elizabeth (9).
SPRING 2002
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