“Getting coverage in terrorism is going to be difficult, getting capacity in exposed areas is going to be difficult, pricing is definitely going to be increased, coverage is certainly going to be questioned and in some cases restricted,” said one London market broker who didnt want to be identified.

The situation was dramatically demonstrated when aviation underwriters started to restrict coverage for war and terrorism for ground liability up to $50 million in the aggregate. Other underwriters started to exclude terrorism from their policies, which would have left companies exposed to property or business interruption claims caused by terrorism.

But many market observers agree that if companies or underwriters have the capacity, or can raise new capital, this is perhaps not the time for retrenchment. As capacity dwindles, demand is rising precipitously and rates are following.

Indeed, some companies such as American International Group and National Indemnity have stepped in to fill some of the coverage gaps. AIG announced that its member companies will lead a placing on behalf of the co-insurance market for aviation war risk and hijacking liability coverage, enabling airlines to obtain $1 billion in coverage required by many airline regulators.

National Underwriter has learned that National Indemnity has capacity available, and indeed has provided a major airline with 100 percent of war and terrorism coverage for ground liability.

Another example of a facility that was initiated to answer a need is one developed by the Miller Insurance Group, a London-based insurance broker. Miller is offering stand-alone terrorism insurance (underwritten principally at Lloyds) because some underwriters have started to exclude terrorism cover principally from property policies.

As one industry observer said: “The best time to provide fire insurance is after a building has burned.”

Nevertheless, brokers in London are concerned that capacity may be allocated to the lines that receive the largest rate increases at the expense of lines with lower rate increases.

“At the moment, were still placing business,” said David Doe, chairman of the Special Risks Division of Alwen Hough & Johnson, a reinsurance and insurance broker in London.

“There is obviously a lot more pressure to put rates up and we are getting orders at a much higher rate,” he said. “The big question is whats going to happen next year with capacity.”

Not only is capacity hemorrhaging out of the London market as a result of the WTC loss, but existing capacity is being diverted to other lines such as aviation, property, catastrophe and personal accident, which are areas very badly affected by the loss, he said.

“If you can get a 400 percent rate increase on an aviation cover, youre obviously going to be tempted to move some of your capacity from an [errors and omissions] risk where you might be getting only a 25 percent rate increase,” he said. “So its an obvious function of supply and demand, and managements are moving, or threatening to move capacity around the market, which is going to make the brokers job harder.”

While most of this capacity movement will happen next year, Mr. Doe said he has spoken to underwriters who are currently affected. “Management is moving capacity around and changing business plans and budgets internally in favor of those areas where there is going to be larger rate increases.”

“Raw supply and demand calculations will mean that rates will move up rapidly,” said David Shipley, who is active underwriter for Lloyds Syndicate 2791, managed by Managing Agency Partners in London. “It wont so much be a question of rapacious demands, but simply because peoples gross lines will be reducing dramatically; it will require a very broad consensus to get cover placed,” said Mr. Shipley.

“Capacity shrinks. Demand will be increasing because obviously peoples perception of how exposures accumulate has been changed by the World Trade Center event,” he continued.

Graham Clarke, chief executive of the Miller Insurance Group, said that brokers prove their worth during such a capacity crunch. “Now that underwriters are getting to grips with their WTC exposures, I think they are beginning to write more, but it is still difficult to get consensus amongst the market in many areas of business,” he said.

He thought the situation would continue this way until the end of the year.

“A lot of people are rather short of reinsurance at the moment and consequently people dont want to add to any of their aggregate exposures. So theyre going to look to either reduce their participation or exit a line of business, particularly in the aggregate areas where there is potential for catastrophe,” he said.

A lot of London market underwriters are going to reduce their participation and write more on a net-line basis, which means brokers are going to have to find more markets, Mr. Clarke said.

The WTC disaster will lead to a very significant market change, said Ross McKenzie, chairman of Aon Re International and also chairman of the London Market Brokers Committee.

“Certainly in exposed areas and exposed categories there could be some capacity shrinkage as people now review their total aggregate exposures as a result of multiple lines of business being affected by a circumstance such as [the WTC tragedy],” said Mr. McKenzie.

“I think a lot of underwriters will look at the form of coverage; in the softer market cycles, people tended to write wider coverages without extra premium considerations,” he said.

Simon Fisher, chairman and CEO of Price Forbes Ltd., a Marsh subsidiary that specializes in U.S. wholesale business, said he is encouraged by the fact that some Lloyds underwriters have begun making commitments to support new construction in the United States. He admitted, however, that previous levels of capacity could be hard to achieve pending the underwriters assessment of reinsurance and required pricing levels.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 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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