September 11 Insurance Industry Finance Essay

Sept. 11 attacks exposed insurance industry to new and unheard costs of global terrorism. Terrorist attacks on Sept. 11 were the most expensive insurance event in history till that date. Sept. 11 attacks cost about $40 billion to the insurance industry (Hartwig, 2002). The previous biggest single event insurance loss was $19 billion for Hurricane Andrew (Hartwig, 2002). Insurance losses from Sep 11 attacks are almost double the losses from any event before that. The most significant aspect of this huge insurance loss was that insurance companies paid claims for an event that wasn't even properly priced in premiums. Terrorism related insurance was covered but not clearly defined and demarcated in insurance policies. “The unthinkable was insured” said Mr. Leidthe (Williams, 2002). The extent of Sept. 11 losses has changed the risk profile of insurance industry dramatically. Lloyd's Chairman S. Riley said “In a world post September 11, when the very nature of risk has so fundamentally altered..” (Lloyd's, 2001). Extent of insurance losses Sept. 11 attacks cost about $40 billion to the insurance industry (Hartwig, 2002). The majority of losses were borne by the non-life insurers with life insurers paying about $2.7 billion only. Though life insurance loss is not significant as that of non-life insurance, yet it was substantial figure in itself and by far the highest single event life insurance loss till date. The table 1 below shows the line of business losses for Sep 11 attacks. The highest single line loss was suffered for business interruption and its share of total losses was 27 percent. The combined loss suffered by property line was 24 percent. Table 1 - Line business losses for the insurance industry

$ billion	Insurance Losses	%
Property - WTC 1 & 2	3.5	9%
Property - Other	6.0	15%
Business Interruption	11.0	27%
Life	2.7	7%
Workers compensation	2.0	5%
Aviation	4.0	10%
Other	11.0	27%
Total	40.2	100%

(Source: Insurance Information Institute, 2002a) The losses incurred by the insurance industry were unprecedented in many aspects. It was the largest single event insurance loss - both in terms of natural and man-made disasters till that date. It was also the first time when losses were catastrophic in life insurance, disability and worker compensation insurance sectors. It was also the largest loss for the aviation insurance. Insurance industry had previously also faced terror losses. The table 2 below lists the major terrorist attack losses in past. The previous highest insured property loss in any terrorist loss was $907 million for a bomb explosion near NatWest tower in London in 1993. The insured property loss in Sep 11 attacks was $20 billion, about 22 times more than the highest previous loss. This huge increase in losses caught most of the insurers unaware and presented a scenario which was not modelled before. Table 2 - Major terrorist attack losses

Date	Description	Losses * $ Millions
Sep 11, 2001	9/11 attacks	20,300
April 24, 1993	Bomb near NatWest tower in London	907
June 15, 1996	IRA bomb near Manchester Mall	744
February 26, 1993	Bomb in WTC Garage	725
April 10, 1992	Bomb in London Financial District	671

* Insured property loss

Adjusted to 2001 price level

(Source: Insurance Information Institute, 2002a) Sept. 11 terrorist attacks also showed the global integration of insurance industry. More than half of the final payouts were from non-US companies (Williams, 2002). Though this caused wide spread losses across borders, yet it also prevented more bankruptcies. The industry has learnt a lesson from this and now more insurers and re-insurers are forming pools to underwrite insurance. Insurance industry reaction Industry wide big changes in insurance sector normally occur at the time of some catastrophic events and losses. After Hurricane Andrew in 1992, insurers started charging high premiums in coastal zones and require special windstorm deductions. The post Sept. 11 insurance industry changes are similar to post Hurricane Andrew changes. Insurance industry has taken many steps to reduce potential losses. The first step was to raise premiums. The post Sept. 11 insurance premiums were much higher and it was not unusual to see premiums ranging from 7 percent to 10 percent of the stated value of coverage in the beginning of 2002 (Hartwig, 2002). Lloyds of London are now offering premiums ranging form 1 percent to 5 percent of the limit value (Hartwig, 2002). The price may fall further in future as the capacity in the insurance sector increases. The average increase in insurance premium was around 30 percent by the second half of 2002. The increase was caused by both reduction in capital supply and higher demand of insurance in light of increasing dangers. With the passage of time, the rise in premiums has slowed down again as more and more capital flows in the insurance industry and creates higher competition. The reduction in reserves post Sept. 11 coupled with regulatory capital requirement took many insurers and re-insurers to the capital markets. Insurance industry had raised total capital of $28 billion by June 2002 (Hartwig, 2002). Even though premiums will fall, it is unlikely that the coverage offered will match pre Sept. 11 coverage. Airline industry was one of the hardest hit by the increase in insurance premiums. Coupled with high losses due to flight cancellations, it approached governments to bail it out. Many governments offered terror risk insurance to airlines. The increase in premiums has reduced the combined ratios to almost the lowest levels seen in the decade before Sept. 11 attacks. It reduces the reliance of insurers on investment income. The industry has seen that low investment returns and high terror losses can occur at the same time and hence it would be naïve to rely on investment returns to offset underwriting losses. The key lessons learnt by the insurance industry from Sept. 11 attacks are:

• Insurers are aware of larger potential losses
• Amount of risk capital required to support insurance is very high
• Reduced capacity results in supply versus demand pressures
• Insurance industry should not base its model on investment returns compensating underwriting losses

The remaining part of the paper looks at the effects of Sept. 11 attacks on the insurance industry. Section II looks at the short term effects and section III studies the medium to long term effects. The paper concludes with section IV. SECTION II - SHORT TERM EFFECTS Insurance industry had to immediately rise to the occasion which was not even properly thought also. Its short term reactions were key to the stability of financial industry. The following are the main short term effects of the Sept. 11 attacks on the insurance industry

• Ability to pay

The attacks were the big test of global insurance industry and demonstrated the financial strength of the insurance industry. In spite of the negative returns from stock markets in 2000 and 2001, insurance industry has managed to pay insurance claims associated with Sept. 11 terrorist attacks. A major factor in that is the spread of payments over time. According to a study by A. T. Kearney, only about 15 percent of total claims were settled in 2001 and about 50 percent of claims were to be settled in 2002 and 2003. The remaining 35 percent of claims were to be settled in 2004 and beyond because of the nature of losses related to injury and pollution. The above spread of payouts means that insurers had to pay approx. $6 billion only in 2001, an amount absorbed by the insurance industry without much of financial damage. The primary insurers and re-insurers raised their premiums immediately after Sept. 11 and that will absorb or even exceed Sept. 11 attacks payout in remaining years. Only one re-insurer, Japanese re-insurer Taisei Fire and Marine, had to file for bankruptcy due to its high exposure in the aviation insurance sector. Ichiro Ozawa, the president of now bankrupt Japanese re-insurer Taisei Fire and Marine said that the loss from reinsurance was caused purely by the terrorist attacks and they could not foresee that such a huge loss would be generated because the four airplanes simultaneously crashed (BBC, 2001). Its position was further financially weakened by the Nov 12, 2001 crash of an American Airlines flight. Another re-insurer Copenhagen Re stopped accepting new business after Sep 11 attacks. But no primary insurer filed for bankruptcy. Another reason for insurance industry's ability to pay huge claims was the wide spread of risk among a large number of insurers and re-insurers. Till July 2002, a total of 119 insurers worldwide had announced their exposure to the Sept. 11 attacks (Hartwig, 2002). Widespread use of re-insurance was the key in preventing large number of insolvencies. The table 3 below shows the estimated insurance losses related to Sept. 11 attacks in July 2002. The largest share of single insurer, Lloyd's of London was only 7 percent. This shows the spread of insurance risks and the prominent reason behind just one bankruptcy due to Sept. 11 attacks. Table 3 - Estimated losses of major re-insurers

$ millions	Estimated losses	% of total losses
Total losses	40,200	100%
Lloyd of London's	2,913	7%
Munich Re	2,442	6%
Swiss Re	2,316	6%
Berkshire Hathaway	2,275	6%
Allianz	1,323	3%

(Source: Hartwig, 2002) The insurance industry ability to pay claims strengthened investors faith in it and helped the industry to raise further capital.

• Underwriting losses

Prior to Sept. 11, insurance companies were earning overall profits mostly through returns on investments. But the two years of equity market losses in 2000 and 2001 forced insurance companies to re-look at their business strategy. The magnitude of Sept. 11 losses meant that equity returns weren't enough to give overall positive profits. Insurance companies were forced to abandon the practice of accepting losses on underwriting business in the hope of covering loss by high investment returns. This means that insurers had to increase premiums to reduce dependence on investment returns.

• Price of insurance premiums

Primary insurers and re-insurers have hiked their premiums since Sept. 11 terrorist attacks (General Accounting Office). The table 4 below shows the increase in insurance premiums across different lines of business in the first half of 2002. Table 4 - Increase in insurance premiums in the first half of 2002

	0%	1-10%	10-20%	20-30%	30-50%	50-100%	>100%
Workers Compensation	5 %	13 %	19 %	32 %	15 %	5 %	2 %
General Liability	2 %	9 %	24 %	45 %	15 %	2 %	1 %
Commercial Umbrella	2 %	4 %	10 %	20 %	27 %	17 %	16 %
Commercial Property	3 %	4 %	16 %	30 %	31 %	13 %	1 %
Business Interruption	3 %	8 %	32 %	33 %	10 %	1 %	0 %

(Source: Hartwig, 2002) We can see that the percentage of no increases in insurance premiums for all lines is only in single digits. The median increase range is between 20 percent to 30 percent. Both commercial umbrella and commercial property insurance lines have similar percentages in 20-30 percent and 30-50 percent range which implies that mean for these insurance lines would be more than 30 percent most likely. In case of commercial umbrella, there were 16 percent insurers who increased the premiums in the first half of 2002 by more than 100 percent. In US, insurance premiums were already rising in 2000. General Accounting Office of US said that insurance premiums were already increasing for commercial coverage prior to Sept. 11 (General Accounting Office). It also said that insurance industry members told it that the increases were a part of the underwriting cycle normal. Yet the GAO acknowledges that the insurance losses from Sept. 11 terrorist attack almost certainly exacerbated the rise in premiums. Net written premiums rose by 5.1 percent in 2001 (Insurance Information Institute, 2000b). The increase in the insurance premium was a result of both decrease in supply and increase in demand.

1. Decrease in supply capital.

The high abnormal losses sustained due to Sep 11 attacks reduced the capacity available to the insurance industry for writing new business. Another factor contributing to the reduction of capital was the decline in equity markets. Equity markets were on a decline since March 2000 and as insurance companies invest a large part of their free cash in equities, it meant that they needed more reserves to offset losses suffered in the equity markets. Lower amount of capital meant that insurers could choose the policies and / or markets offering high insurance premiums.

2. Increase in demand.

The scale of losses from Sep 11 attacks again brought back the attention to the scale of risk businesses carried and the necessity of a mechanism to offset it. Well diversified companies in terms of geographical reach like British Petroleum have the option of “self-insurance”. BP decided based on the wide spread geographical spread of its business units and plants that an attack or a loss of a single location would not jeopardise the whole business. It is also unlikely that more than one location will face catastrophic disaster at the same time. Hence BP took the decision of not paying high insurance premiums every year. But less diversified businesses don't have this option. The terrorist attacks increased the demand of insurance policies from businesses. The fear of the loss increases demand and London insurers Catlin and Hiscox have predicted that the Katrina hurricane in USA would boost insurance demand and rates (Slater, 2005). Lloyds and other insurers predict that the Katrina hurricane would cause heavy losses but would be beneficial in the longer term as it will push prices for affected risks steeply up. At the same time there is some rationale justifying increase in insurance premiums. Insurance premiums normally follow cyclical trends based upon the capacity and willingness of primary and re-insurers to take risk. Prior to Sept. 11 attacks, the insurance premium rates had peaked in 1993 and since then they were on constant decline (OECD, 2002). The rates had only stabilised in 1999 and started moving up in 2000 only. Even after one year of premium increases since Sept. 11 attacks, the insurance premiums are still lower than the peaks seen in 1993.

• Underwriting losses

Since 1975 till 2001, insurance industry had underwriting gains in only two years and that too in as early as 1977 and 1978. Since 1978 the insurance industry had consistently made underwriting losses and they were about $30 billion in 2000 also (Insurance Information Institute, 2002a). The increase in insurance premiums would reduce underwriting losses.

• Combined ratio

The combined ratio for US reinsurance sector was highest and worst ever in 2001. It was 142.9 percent in 2001 and next highest ratio was 126.5 percent in 1992. This shows the extent of losses due to Sept. 11 attacks (Insurance Information Institute, 2002a). The combined ratio for Lloyd's reinsurance in 2001 was 142 percent (Lloyd's, 2001). The combined ratio was 116 percent for all lines combined ratio. The combined ratio for all lines combined was also highest in 2001 but the next high was 115.8 percent in 1992 (Insurance Information Institute, 2002a). So the impact on all lines combined ratio was not as bad as on re-insurers. High premiums post Sept. 11 attacks resulted in one of the lowest combined ratio in 2002. The combined ratio for the US reinsurance was 102.3 percent in the first quarter of 2002 and it was very close to the lowest of 100.5 achieved in the past one decade (Insurance Information Institute, 2002a). For all US lines combined, the ratio at 101.6 percent was the lowest in last one decade. This shows that the increase in premiums has significantly increased the profitability of insurance industry.

• Coverage

The unprecedented high losses stemming from Sept. 11 attacks forced insurers to re-look at the range of risks covered. Another major post Sept. 11 step was the reduction of coverage offered by the insurance companies. Mr. Hess of Swiss Re said in 2002 that Swiss Re had cut its potential exposure to less than half for events similar to attack on World Trade Centres (Williams, 2002). Patrick Liedthe, Secretary General of the Geneva Association also reiterated the above point and said that the exposure of the global industry to terrorist attacks is much lower post Sept. 11 attacks (Williams, 2002). Terrorism exclusion One of the most significant policy changes in the post Sept. 11 insurance sector is the introduction of terrorism exclusion from general insurance policies. Insurance industry was covering terrorism related risks even after the first attacks on World Trade Centres in 1993 and Oklahoma City bombing in 1995. The fact that the risk was covered for very little or no premium immediately forced most of the insurers to exclude acts of terrorism from general insurance coverage. The other alternatives to terrorism exclusion were either to stop writing new business in soft target industries like commercial landmarks, chemical and power plants etc or to charge steep premiums to take care of more frequent terrorist attacks. The absence of statistically significant data hindered the quick development of rationally justified terrorism risk pricing. If insurers stop writing new business because of terrorism risk then it would expose businesses to financial risk from so many other events like fire, floods, etc. So it was better to exclude terrorism risk in the immediate aftermath rather than pricing irrationally or stop writing new business. After initial withdrawal period of terrorist related insurance, private insurance market again saw insurance products for these types of major attacks (OECD, 2002). Some of the insurance instruments like catastrophic bonds already existed in the private market even before Sept. 11 attacks. Catastrophic bonds are not actively traded and are mainly used for special events rather than being available for general use. The reluctance of insurers to cover terrorism insurance and the high premiums charged by many insurance companies has left many companies with no terrorism cover. In July 2002, about half of the businesses were not covered by terrorism cover at all (Hartwig, 2002). Only 14 percent of businesses had full coverage. This shows that only a minority of businesses are fully prepared to face terror risks. Even though most of the companies don't have self-insurance luxury that can be afforded by big multinationals like BP, they are not prepared to pay high insurance premiums to safeguard their business against terror attacks. Insurance Information Institute has a Rate On Line index which correlates the link between price of insurance and the limits of risk offered. The Rate On Line was 130 in 2001 and it increased to 215 in 2002 after steep increase in premiums and reduced limits (Insurance Information Institute, 2002a).

• Rebuild reserves.

The high abnormal losses of Sept. 11 attacks resulted in $80 billion reduction in insurance industry's ability to meet future insurance claims (Williams, 2002). The reduced capital base and increase reserve requirement to handle equity losses mean that many companies were either unable to take any further shocks or had to raise further funds to strengthen their capital base. Many companies raised additional capital to meet regulatory capital requirements. By the end of 2001, insurers had raised $20 billion in new capital (Hartwig, 2002). And by June 2002, the total capital raised increased to $28 billion. The pace of capital raising slowed down significantly thereafter as the reserves rose due to higher premiums. It is hard to categorise the amount of capital raised separately into terrorism related insurance and other insurance lines. They thing important here is to note that Sept. 11 attacks acted as a catalyst for fund raising.

• Role of government

As a result of complexity in pricing terrorist risks and associated high losses, many insurance firms withdrew risk coverage of terrorist attacks. This left many firms, vulnerable to such attacks, exposed to huge losses in case of terrorist attacks. US government then promulgated Terrorism Risk Insurance Act 2002 to cover major terrorist risks.

• Aviation insurance

We now look at the aviation insurance industry, one of the two main insurance sectors affected by the Sept. 11 attacks. It was the first sector to react and it is a general belief that post Sept. 11 knee jerk reaction of the aviation insurance sector was an act of over reaction. Giles Williams of Wills Global Aviation said that the industry over reacted and it shouldn't expect profits in the year of its biggest loss (Shapiro, 2002). Aviation insurance sector lost $5.5 billion in 2001, out of which $3.97 billion was related to Sept. 11 attacks alone (Shapiro, 2002). The high loss prompted aviation insurers to not only swiftly raise premiums after the attacks but also impose new surcharges. Aviation insurers started charging $1.25 per passenger surcharge to replenish premiums. The increased premium and new surcharge increased insurance premium income by almost three folds in 2002. Aviation insurance premium totalled around $4 billion in 2001 as compared to around $1.2 billion in 2000 (Shapiro, 2002). Aviation insurers justified the increase by saying that the industry had suffered on average $1.7 billion loss each year between 1992 and 2000 (Shapiro, 2002). In addition to that insurers have to pay about $1.5 billion in administration, re-insurance and higher retention of primary insurers. One change welcomed by the airline industry is the better rationale for pricing. Previously aviation underwriters traditionally calculated liability premium by the kilometres travelled by the airplane.

• Indirect effect of insurance industry on non-insurance industries

Sept. 11 attacks were probably the first insurance related event that had an impact beyond the directly related insurance sectors. It was expected that the attacks would lead to increase in premium for commercial property and airline insurance sectors. But the attacks put the focus on all sectors / industries that are thought to be soft targets for terrorist attacks. The rise in insurance risk premiums were more in line with their risk profile than any other factor. Natural terrorist attacks prone industries such as shipping, tourism and energy generation plants have faced some of the highest increases in insurance premiums. Commercial property and liability insurance rose by about 30 percent on average in one year after Sept. 11 attacks (OECD, 2002). “Target” structures - those whose destruction can cause multiplier effect - such as chemical and power plants and high rise office buildings saw even steeper increases. One thing to note is that the increase in premiums came after decade of decline. Even though the premiums have increased considerable the average insurance premium is still lower than the peaks seen in the decade before Sept. 11 attacks. Though the average insurance premium may still be lower than the levels seen in 1993, the insurance premium rates for “target” industries have risen sharply and hence the rise might be skewed too unfavourably for them. Reduced insurance coverage may hinder the availability of sufficient financial instruments to cover risks associated with terrorism. Lower investment and capital expenditure may have a negative impact on economy. Insurance industry took many steps immediately to correct the situation caused by the Sept. 11 attacks. We saw above that insurance premiums were raised, risks covered were reduced and many companies partially or fully withdrew from the terror risk insurance market. The above immediate steps did help the insurance industry to increase capital and profitability in the short term. But the question looming is whether the insurance industry would be able to continue taking steps to maintain or increase its profitability. And how the short term steps would fare in medium or long term. SECTION III - MEDIUM TO LONG TERM EFFECTS We now look at the medium to long term effects of the Sept. 11 attacks. The major effects are:

• Price of insurance premiums

Post September 11, the net premiums in the US reinsurance industry increased by 14.1 percent in 2002, a rate of growth not seen since 1986 (Insurance Information Institute, 2002b). Lloyd's mentioned in its 2001 Global Results pointed that early 2002 is seeing significant improvement in business conditions caused by higher demand and increased prices (Lloyd's, 2001). The cost of insurance price dropped significantly in 1990s. The cost of risk to business dropped by 42 percent between 1992 and 2000 (Hartwig, 2002). If we add in the affect of inflation, the real drop in insurance premium would be much more. So sooner or later the insurance premiums had to increase. Insurance premiums also had to rise due to increasing medical and legal costs. The steep rise in insurance premiums attracted more capital to the insurance sector. In its Global Results for 2001, Lloyd's pointed out that the inflow of capital, especially in Bermuda would slow down the increase in insurance premiums (Lloyd's, 2001). It is difficult to escape the cyclical nature of insurance sector. Increased capital will again increase competition leading to renewed price competition in the medium term. General Accounting Office of US government also pointed out that while there may be some examples of excessive price increases in the market, as long as insurance continues to be available, it is likely that competitive pressures will ultimately remedy that problem (General Accounting Office). Lloyd's and US General Accounting Office's assessment of medium term slower growth in insurance premiums was correct. The US property and casualty insurance industry's net written premium growth was only 4.7 percent in 2004 as compared to 9.8 percent in 2003 (Insurance Information Institute, 2004).

• Pricing of terrorist attacks

In Sept. 11 attacks, insurers lost heavily on life, building and airplane insurance at three different places including one for two World Trade Centre towers. It is extremely difficult to price the probability of multiple occurrences for such events. But we are seeing more of such events and it was demonstrated again in July 7, 2005 when four near simultaneous terrorist attacks shook London's underground and bus network. It is difficult to price risks related to terrorism. Several factors contribute to this pricing conundrum. First, terrorist attacks are very less in numbers as compared to the frequency of other insured losses. So there is lack of sufficient data to model insurance premiums. Second important thing is the possibility of many catastrophic events occurring at the same time. Since Sept. 11 attacks, world has seen many more terrorist attacks. Though the losses suffered there are not significant to the scale of Sept. 11 destruction, yet the insurance industry is more aware of the scale of losses. The slowdown in insurance premium growth indicates that the insurance industry is now pricing terror risk more rationally.

• Coverage

In a study conducted by Joint Economic Committee of Congress, US on terrorism insurance, the major finding was the limited market for terrorism related insurance post Sept. 11. Re-insurers started excluding terrorism from insurance policies in the beginning of Jan 2002. With no government assistance, primary insurers were forced to exclude terrorism related coverage from insurance policies too. US government soon introduced Terrorism Act of 2002 to act as insurer of last resort. Since then many primary insurers have re-started offering terrorism insurance. But the market is not as wide and deep as it was before Sept. 11 attacks. As re-insurers first excluded terrorism cover, primary insurers limited the coverage. Initial coverage was limited to at most $150 million. The coverage was also subject to higher deductible. Over time the limit has increased but it is no where near the previous coverage levels. Also some companies are not writing terror insurance policies. Even the ones who are writing terror policies are defining limits properly. It is unlikely the commercial property and casualty insurance will ever get the same terror risk as was there before Sept. 11 attacks.

• Increased risk at primary insurers level

The higher reinsurance costs have lead many primary insurers to retain higher amounts as reinsurance at lower levels is now too high and economically unviable. Primary insurers are still writing terror risk insurance policies but not taking reinsurance as the costs of high reinsurance don't justify taking them. They also want to keep higher proportion of insurance premiums with them to pay for terror attacks. But not taking reinsurance has left them exposed to high costs if any major terror attacks take place. There is a possibility of failure of such primary re-insurers.

• Capacity

The capacity of the insurance industry is limited and as it has been demonstrated by the Sept. 11 attacks, the terrorism related losses could easily run into anything catastrophic. The insurance industry has managed to survive Sept. 11 attacks without much financial jitters. But a few more attacks of such scale can easily push a large number of insurers into bankruptcy. This will have an irreparable damage on not only the financial health of insurance industry but also on the general economy and growth. In June 2001, the aggregate claims paying ability of the property and casualty insurance industry was about $300 billion. The Sep 11 property and casualty losses are about 10 percent of the claim paying ability. Though the claims are to be paid over time, yet the payout represent a significant part of the claim paying ability. We should also exclude some categories like auto and home from the total property and casualty claim paying ability as the attacks targets were mainly commercial property. The surplus claim paying ability of the related insurance sectors was just $100 billion before Sept. 11 and fell to $80 billion after the attacks (Hartwig, 2002). The limited coverage with restrictive terms along with withdrawal of insurers from many markets meant that the insurance industry lost another $40 billion or so in capacity (Hartwig, 2002). The introduction of Terror Act 2002 by the US government increased investors' confidence in the insurance industry. The bill brought back many insurers and hence increased the capacity. The increase in capacity slowed down the increase in insurance premiums.

• Market perception

Stock markets are a good indicator of things to come. Fear of high Sept. 11 related claims led to dumping of insurance shares in the week after the Sept. 11 attacks. The insurance company shares fell by about 10 percent in the first week of trading after Sept. 11 attacks (Hartwig, 2002). Investors were also concerned about the possibility of more such large scale attacks. Warren Buffet mentioned that any nuclear attack by terrorists can wipe out the whole insurance industry (Hartwig, 2002). But the initial negative sentiment towards insurance shares soon reversed into a positive outlook. The sharp increase in premiums made investors take a re-look at the medium and long term profitability of the insurance industry. The positive outlook was also strengthened by the fact that only one re-insurer filed for bankruptcy. Investors also woke up to the idea of reducing exposure and tightening underwriting standards by the insurance industry. Who wouldn't like to invest in an industry which is increasing the price of its products yet at the same time offering less to its customers. It is a double win situation.

• Role of government

Sept. 11 attack has also established a closer relationship between the insurance industry and governments. The US Senate passed the Terrorism Risk Insurance Act of 2002 on June 18, 2002. The US President signed the bill on Nov 26, 2002. The insurance act is about sharing of terrorism related insurance losses between insurers and the government. The insurance industry was asked to retain certain amounts to meet terrorism related claims. The government was acting as re-insurer of last resort and agreed to pay 80 percent to 90 percent of the losses based on the amount of losses. The US government also capped its liability on all cases to $100 billion. The initial sharing agreement is for three years and the government will then review the extension at that stage. US government's intervention to take risk previously insured by the private sector was intended to be a short to medium term step. It was a step taken to restore public confidence in business. It appears that the knee jerk reaction of aviation insurers in increasing premiums has driven business out and brought government in. As aviation insurance sector had made losses in 8 out of 10 years prior to 2001, it was probably not the right insurance sector for private companies. Or is the government entry as insurer of last resort in US was inevitable? Airline industry was already reeling under heavy losses due to post Sep 11 flight cancellations, lower ticket sales and general poor state of economy. The high increase in premium made it very difficult for them to survive. US based airlines have formed Equitime, a company incorporated to cover war and terrorism risks. Over time it is expected to build a capacity of $1.5 billion to provide coverage for war and terrorism risks. The US federal government will act as the insurer of last resort. US government helped in setting up of Equitime by guaranteeing its role as insurer of last resort. Prior to that, the US government had little or no role in private insurance market. But the governments across the world, especially in developed countries, have been acting as re-insurer of last resort. And these are the countries who have seen terrorism related violence in the past. UK had been facing IRA related terrorist attacks for decades. To take into account the potential of very high losses the government set up Pool Reinsurance. Under this scheme, there is limited private cover with additional excess cover for both property damage and business interruption made available for companies who join Pool Re. The UK government acts as re-insurer of last resort in case of insolvency. In Israel, terrorism risk is excluded from standard policies. Israeli government covers terrorism related property damage losses. Post Sep 11 attacks, France and Germany have also set up state sponsored re-insurers for terrorism related risks. In case of France, the membership of this re-insurer is compulsory for all members of French insurers association. The UK government also extended the terrorism insurance cover for commercial property in 2002. The increased threat and frequency of big terrorist attacks makes it very difficult for private insurers to cover all terrorism risks and government's entry either as a re-insurer of last resort or pool provider was inevitable. Alan Greenspan said to the Joint Economic Committee of US Congress that in situations of violence, the viability of free markets may require that the costs of insurance are borne by the taxpayer (Hartwig, 2002). So what was initially thought to be short or a medium term measure would probably become permanent. It is very difficult for governments to withdraw support. Since many other nations have not withdrawn such facility, US government would also keep it.

• Effect on small businesses

The smaller firms are also feeling the post Sept 11 insurance changes. In UK, The Federation of Small Business has warned that soaring insurance costs of obligatory employers' liability insurance premiums are forcing many small firms out of business. Small firms don't have negotiating power and are often squeezed by their bigger customers. They survive many times on tight margins and increase in insurance premiums may just be the tipping point for some to close business (Madslien, 2002) Insurance industry took immediate steps after Sept. 11 attacks to maintain its financial health. Many of those steps have medium to long term effects on insurance industry. The industry has been plagued by cyclical nature of high and low insurance premiums and low and high combined ratios. The premiums increased after Sept. 11. But the rate of growth has slowed down in the last year. The insurance industry target of around 90 percent combined ratio is still some distance but if it keeps increasing premium rates, even at a low rate, it might reach there. The only thorn in that achievement would be the industry itself, where low combined ratios pull in more capacity and higher competition lowers insurance premiums. SECTION IV - CONCLUSION Sept. 11, 2001 attacks were the biggest terrorist attacks ever and exposed insurance industry to man made catastrophic losses. Terrorist attacks on Sept. 11 cost about $40 billion to the insurance industry and are almost double the losses from any event before that. Insurance industry though covered terror risk yet it wasn't either priced or was priced very less in the premiums. The loss faced by the commercial property insurance industry was about $10 billion and so was the loss in the business interruption line. Yet the insurance industry survived bankruptcies and assured the world of its ability to pay claims. This was due to the global nature of re-insurance industry and sharing of risks. Now more insurers and re-insurers are forming pools to underwrite insurance. The industry took quick steps of limiting or withdrawing terror cover. It is not easy to price terror and the easiest way out was to stop terror cover. This left many businesses exposed to high risk of terror. Over time more insurers have started offering terror cover but have limited their scope of losses. This is one of the major impact of Sept. 11 attacks and it is unlikely that the insurance industry will ever offer pre Sept. 11 terror cover. It also increased premiums to make up the losses in the next few years. The increase was about 30 percent on average across most of insurance lines of business. The premiums have been increasing since then and have resulted in some of the lowest combined ratios in the last 15 years. But the lure of higher premiums has brought in more capacity into the insurance market. This has again increased competition and led to lower growth in insurance premiums. Insurance industry should try not to again fall into cyclical trend of high and low premiums. It should learn the lesson now of now basing its model on investment returns compensating underwriting losses.

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  BIBLIOGRAPHY AND REFERENCES BBC (2001). “Japanese insurers reel”, https://news.bbc.co.uk/1/hi/business/1669703.stm General Accounting Office. https://www.gao.gov/new.items/d02472t.pdf Hartwig, R.P. (2002). “One Hundred Minutes of Terror that Changed the Global Insurance Industry Forever”, Insurance Information Institute Insurance Information Institute (2000). “2000 - Year End Results”, Insurance Information Institute, https://www.iii.org/media/industry/financials/2000yearend/ Insurance Information Institute (2002a). “The Long Shadow of September 11 - Impact & Implication for Insurers and Reinsurers”, Insurance Information Institute, www2.iii.org/media/presentations/sept11/ Insurance Information Institute (2002b). “2002 - Year End Results”, Insurance Information Institute, https://www.iii.org/media/industry/financials/2002yearend/ Insurance Information Institute (2004). “2004 - Year End Results”, Insurance Information Institute, https://www.iii.org/media/industry/financials/2004yearend/ Lloyd's (2001). Global Results, 2001, https://www.lloyds.com/index.asp?ItemId=2416 Madslien, J. (2002). BBC. https://news.bbc.co.uk/1/hi/in_depth/world/2002/september_11_one_year_on/2207645.stm OECD (2002). “Economic Consequences of Terrorism”, www.oecd.org/dataoecd/11/60/1935314.pdf Shapiro, S. (2002). “Aviation market's Sept. 11 response debated”, Business Insurance, Chicago, Aug 5, 2002, Vol. 36 Slater, S. (2005). “Catlin and Hiscox see Katrina loss but rates boost”, www.reuters.co.uk, 12 September 2005 Williams, F. (2002). “Attacks force insurers to rethink strategy”, www.ft.com, Sep 10, 2002

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