“The largest and best-capitalized reinsurers–almost irrespective of the extent of their losses–will benefit most from market recovery and heightened credit sensitivity among brokers and cedents,” he said, noting that smaller and marginal reinsurers are particularly vulnerable.

Although most reinsurers will have the financial resources to handle claims and cash flow without difficulty, “their reduced capitalization may constrain their ability to benefit from market recovery, or may lead their parent companies to question their commitment to reinsurance,” Mr. Murray continued.

Middle-market reinsurers and new entrants will be challenged to demonstrate their added value “in a consolidating and increasingly credit-sensitive reinsurance marketplace,” he said.

Hosting a similar conference call two days later, analysts for Standard & Poors in New York and London fielded a series of questions about the willingness of reinsurers to pay the claims presented to them, without litigation or arbitration hassles over claim definitions and exclusions.

“Are companies indicating that they are anticipating refusals by reinsurers to pay claims based on the causes–acts of terrorism or acts of war?” one caller asked during the S&P conference. “We have heard no insurers mention that theyre facing issues of revocation of potential claims” because of such clauses, said Mark Puccia, an S&P senior analyst in New York.

Speaking from London, Christian Dinesen agreed. “The very large estimates being posted by the reinsurers indicate that they are facing up to some very large payments,” he said.

“Considering that these are very substantial figures that they have to put up, if they felt at this stage that they had any defense or any mitigating circumstances, I would have been extremely surprised if they hadnt mentioned them,” he said.

Mr. Puccia said that recent rating actions announced by S&P, lowering the ratings of two insurance organizations and putting 15 others on “CreditWatch negative,” do not anticipate reinsurers denying claims based on act of war or other types of exclusions. “We believe reinsurers will pay,” he said.

To the extent that reinsurers do not meet the obligations presented to them by primary companies, there are a number of primary companies that have established net exposures that heavily depend on reinsurance recoverables, he said. The difference between the net claims for these companies and gross claims can be “quite substantial,” he said.

That holds true even within the reinsurance community with respect to retrocessions, he said.

When asked to quantify that difference later on, Mr. Puccia said, “it varies all over the board.” While the spread might not be as large as a 10-times figure suggested by one questioner, it could be “many, many multiples” for some companies, Mr. Puccia conceded.

Taking a slightly different tack than Mr. Dinesen, another S&P analyst, Don Watson, also tried to explain why S&P assumes that reinsurers will pay the types of claims that will arise from the terrorist attacks. Speaking from New York, Mr. Watson said: “The claims that are likely to arise here are much clearer than you have in something like asbestos or product liability, where it's not clear about whether a loss has occurred or what caused it. Here its pretty clear.”

“I think the reinsurance companies realize that thats what theyre in business for. They are here to pay these types of claims. And I really would be surprised to see much in the way of efforts to get out of their obligations here,” Mr. Watson added.

“The point to understand is that for the reinsurers who deny claims, it would affect their market position going forward. It would affect their ability to do business in 2002 and beyond. Because if theyre not willing to pay claims on a catastrophe of this nature, one would have to wonder what their policies are worth,” he said.

Mr. Watson did say that one big issue that will be debated is whether the attacks should be considered as a single event or as multiple events. “That is a definitional one and I think the market pressure is going to come to a consensus opinion on that rather quickly. But that should be the extent of it,” he said.

He noted that for aircraft losses, as most companies put numbers on their potential losses, they are looking at the attacks as multiple events. But for the World Trade Center itself, most companies are considering the attacks as a single event, he said.

“If it stands as a single event, these loss estimates should hold pretty firm. If courts or public opinion later change that, then we might see multiple increases” in loss estimates, he said.

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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