Earlier this year, A.M. Best reported that p-c insurers, facing the combination of a $30 billion catastrophe, a $35 billion reserve deficiency, a $25 billion decline in stock investments and $20 billion of unfunded asbestos losses, still had $88 billion more capital then they needed to keep their current Best ratings.

That study, “Excess Capital–Both A Blessing And A Cure,” considered the level of capital adequacy if one catastrophic event occurred, Matt Mosher, group vice president, property-casualty for A.M. Best in Oldwick, N.J., said in an interview last week. “Well, that one event has occurred. And you still have the risk of the hurricane next week. Clearly, this [terrorist event] is a direct hit to that number.”

Meanwhile, a decline in the equity markets is having an impact across the industry, he noted, citing stock market volatility as a continuing threat. “I wouldn't feel comfortable saying just because it went down this far, it's not going to go down any further. There is still risk,” he said, commenting on stock market activity on the first trading day after the attacks. “What happens if there is a military event? The impact on the markets is completely uncertain.”

“Basically, everything that has occurred, I would view as a direct hit to the number that we quoted” in the study, he said. He added that loss reserve deficiencies have built up, noting that Best's $88 billion figure was based on year-end 1999 financials with some extrapolation.

“I wouldn't feel comfortable, even before this event, saying that the $88 billion was still the amount,” he stressed. “The capitalization following this event is significantly lower than the $88 billion that we quoted.”

Mr. Mosher made his comments a day after the Insurance Services Office, Inc. in New York and the National Association of Independent Insurers in Des Plaines, Ill., jointly released first-half results for the industry, reporting that surplus dipped below $300 billion, down 6 percent (see table on page 6).

Still, there is excess capital in the p-c industry at this point, Mr. Mosher asserted. And that excess is certainly not evenly distributed, he noted, reiterating a key point of the earlier study. “State Farm will take some losses, probably on some of the small commercial lines of business, but certainly doesn't have all its excess capital exposed,” he said.

“There may be a fair amount of capital [at risk], but a lot of the stronger carriers are hit by this. For the most part, they can probably withstand it and remain strong. But they are not as strong as they were,” he added.

Companies like Hartford, AIG and Chubb are going to take the bigger hits among domestic commercial insurers–and they can afford it, according to Adam Klauber, managing director of Cochran, Caronia Securities in Chicago. “Hartford just came out with a $450 million estimate. They can absorb that,” he said.

In a statement released three days after the attacks, Standard & Poors in London and New York said that the strongly-capitalized insurance industry was not crippled by the terrorist events.

Estimated loss totals “would have to exceed $50 billion before we would begin to worry about the insurance system,” said Steven Dreyer, an S&P managing director, in the statement. He added, however, that once insurable losses exceed $10 billion or $15 billion, S&P expected to see a significant impact on the balance sheets of individual insurers.

Four days later, with another statement announcing that aggregate losses accumulated from 55 insurers and reinsurers had topped $14 billion (based on publicly-available and confidential information), S&P said many insurer and reinsurer ratings would soon go on “CreditWatch with negative implications.”

Keith Buckley, managing director and head of the insurance practice for Fitch in Chicago, speculated that if the industry burden from the terrorist attacks became too heavy, insurers could find themselves shouldering a smaller than previously-expected load in other areas.

“Lets say that the World Trade Center and the Pentagon losses together were much larger than people are thinking, and that the capital, while still adequate, becomes more weak. Then would the asbestos claims be as high as people were previously thinking? Or if the industry is no longer the deep pocket that it was thought [to be], then would the lawyers start backing off?” he said.

Rating agency representatives said that while catastrophic events, like hurricanes and earthquakes, were contemplated in the capital adequacy assessments that went into their ratings, a $30 billion terrorist event was not. They also said that the impact of the terrorist attacks will be reviewed on a company-by-company basis in the coming weeks.

But the terrorist losses, even at $30 billion, are “probably absorbable,” Mr. Buckley said. “To the extent there might be rating actions, we're probably talking a tick or two for most companies, worst case, rather than taking a triple-A company down to a single-A-minus,” he said, adding that there will be marginal rather than major adjustments, “except for the rare company that might wind up having an undue concentration” of losses.

Mr. Mosher said that most carriers with losses related to the terrorist attacks will still have excess capital. While they will suffer a hit to their capital, the question is whether that capital still supports their rating level. And, for the most part, the answer will be yes, he said.

However, “I know for a fact that there are some carriers where the answer is no. We have concerns. I would expect some rating actions to come out of this,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 21, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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