After the tragedy of September eleventh, I found myself at a loss for words. It was hard, in fact, to conduct business as usual; nothing seems usual anymore. In the world of risk, insurance is used as a vehicle to level the field. How does one handle a risk like this catastrophe? I am certain that on a personal level for those involved, no amount of insurance could ever make them feel whole again after suffering such loss.
As of the time of this article, there are estimates in the billions of dollars involved in this catastrophe. Congress is appropriating funds to assist New York in cleanup and rebuilding its infrastructure along with funds dedicated toward fighting terrorism. The federal government is rightly fulfilling its promise to come to the aide of its citizens in the case of great disasters. We are familiar to this response through recent natural events like fires, storms and earthquakes.
This time people are the cause of the catastrophe.
Current estimates of the human losses in New York are around 5,700 missing people. No matter what the count ends up being, the human cost like the physical destruction is truly devastating to the nation.
One industry report on natural and man-made disasters reported in February that more than 17,000 individuals worldwide died in 2000 from disasters that resulted in losses totaling $38 billion. The largest single loss of life came from flooding in India and Bangladesh, where 1,200 people died. The costliest catastrophe to the insurance industry was the September Tokai floods in Japan, where insurers paid $1.04 billion in damage claims. In 2001 Tropical Storm Allison cost the
industry $2.5 billion. It appears that this disaster may surpass the worst catastrophe on record, Hurricane Andrew, which cost the industry over $20 billion.
The most expensive man-made disaster to date was the Piper Alpha oil platform explosion off the coast of Great Britain in 1988. It cost insurers close to $3 billion. Domestically, the top three man-made disasters to date affecting the insurance industry have been the 1992 Los Angeles riots ($775 million), the 1993 World Trade Center bombing ($510 million) and the 1995 Oklahoma City bombing ($125 million).
For some historical perspective, the Japanese air attack on Pearl Harbor on Dec. 7, 1941 resulted in three battleships, two destroyers, and nine other ships being either sunk or crippled. A total of 140 aircraft were destroyed and 80 others severely damaged.
In terms of human casualties, Pearl Harbor yielded 2,330 military servicemen and 100 civilians killed, and 1,145 military personnel wounded.
Insurers and their re-insurers will be affected dramatically by these losses but none should be devastated financially. When the risk financial markets are hit, they have to recover their losses over future years through premiums, usually spread over 20 years to smooth out the spikes in loss dollars.
There were some concerns over statements made by President Bush and other political leaders that the attack on the Trade Center and the Pentagon amounted to "Acts of War," which might lead to a denial of insurance coverage. The insurance industry have come forward to affirm that terrorist acts are covered by most property/casualty policies, and that claims will be paid. There is obviously a difference between the political (or emotional) definition and the contractual
definition of an "Act of War". A military action against private property may be excluded in some insurance contracts, leaving restitution with the government responsible for the act. There remains an open question whether terrorist actions, after a war is declared against them might be excluded.
Life insurance policies are normally not issued with the War Hazard exclusion. If we were at war, some policies might have had this endorsement added. If Congress declares war or it seems immanent, companies may begin offering life policies with a War Hazard exclusion added. The wording in these exclusions can vary. Most often they will exclude the death of a person in the military killed during an armed conflict or war. Since the Korean and Vietnam conflicts, courts have held
that war meant any actual hostilities between armed forces.
If an act of terrorism is the cause of a civilian's death, it may be left to the courts to determine whether the terrorist was an agent of a government carrying out an act of war. The exclusion can only be attached to a life insurance policy at its inception - so existing policies are not affected.
Russell Janecka is a Certified Insurance Counselor. He is the owner of Janecka Insurance Agency in Victoria, and serves on the board of directors with Germania Insurance Companies. (361) 573-4475 e-mail: info@jiavic.com
