Insurers put businesses, state in bind

Terrorism, investments, flat charges spur average premium increase of 30%

Restricted coverage also factor

Losses from Sept. 11 likely to reach $40 billion

renewals aren't routine

July 21, 2002|By Meredith Cohn | Meredith Cohn,SUN STAFF

If terrorists were to target the Camden Yards sports arenas, the State House in Annapolis or Baltimore-Washington International Airport, Maryland might find itself without insurance money to rebuild.

Like other governments and businesses living with financial ramifications from the Sept. 11 attacks, which are expected to cost the insurance industry at least $40 billion, Maryland found that renewing its annual insurance policy was anything but routine.

The state was dropped.

Maryland's coverage remains in force for now because it is contesting the cancellation. But the state is not alone in facing a problem. Commercial and public properties nationwide are getting caught in a double squeeze.

Insurers, reeling from Sept. 11 losses, sagging investments and 15 years of relatively flat rates, are boosting rates an average 30 percent at the same time that they are limiting or eliminating coverage for acts of terrorism.

"Businesses are being exposed to risk that they, quite frankly, had never contemplated until last year," said Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute, a clearinghouse of industry research.

"Unlike cars and houses, no one has a good idea of the frequency or costs of [terrorism] claims, and insurance companies now don't want anything to do with terrorism insurance at all," he said. "The only reason there weren't mass bankruptcies after Sept. 11 was the risk was spread around to 100 insurance companies around the world."

But, he said, they can no longer take on the potentially bottomless pool of claims.

As annual policies expired after Sept. 11, insurers found that the companies they bought insurance from, so-called reinsurers, would no longer share the risk. So, the insurers - with the legal blessing of Maryland and 44 other states - specifically excluded terrorism from their policies in many cases.

The word terrorism had rarely shown up in all the fine print in the property and liability insurance policies before Sept. 11. Because it was not specifically excluded, it was covered by default.

As a result, payments arising from the attacks will cost the industry about three years worth of profit, according to the American Insurance Association. Last year the property-casualty insurance industry lost $7.9 billion - its first-ever loss - because of those costs and poor investment returns, according to the Insurance Services Office Inc. The industry earned $20.6 billion in 2000.

Insurers typically have excluded damage resulting from acts of war. And floods and crops are generally insured by the federal government.

"But Sept. 11 came out of the industry's pockets," said Julie Rochman, a spokeswoman for the insurance association. "Standard forms didn't mention terrorism. It was basically a freebie. ... We still can't price it, we don't know anything about it, and in our way of thinking, it's uninsurable. We can't insure things if we can't share the risk because we won't be around to pay the claims."

The industry, as well as many policyholders, are banking on legislation pending in Congress that would limit the industry's costs in the event of another catastrophic terrorist attack. Rochman said the federal government would offer stability to the industry and encourage insurers to return to the market by taking on the role of reinsurer.

The House and Senate have passed versions of the bill and must hammer out their differences. The federal backstop would stay in effect for one to three years and provide coverage after the industry and individual companies' payments reach a specified level. The House bill requires the money to be repaid, but the Senate version does not.

In the meantime, Maryland is seeking to force its insurer, the American affiliate of London-based Royal & SunAlliance Insurance Group PLC, to continue its property insurance.

The Maryland Insurance Administration, which oversees insurers in the state, has sided with the state treasurer's office, which bought the policy. An administration panel has heard the company's appeal, and a ruling is expected by the end of the month.

"Our renewal came up in February, and our carrier of 11 years sent a nonrenewal notice to us," said Thomas C. Kelley, director of insurance for Maryland. "We've deemed it not to be proper based on our regulations. They're fighting us."

If the company exhausts the administration appeals, it is expected to take the matter to court. And even if Maryland is ultimately successful in forcing Royal & SunAlliance to offer it property insurance, state officials expect to pay more, and they do not expect to retain terrorism insurance.

Premiums that had cost the state $1 million annually will likely cost $3 million for $500 million in coverage. The increases would be the result of rate increases and construction projects that have added to state holdings, Kelley said.

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