Insurance producers represent the front line in the transfer of risk for the six million businesses in the United States and its 281 million citizens. Each and every day they place coverage that keeps planes in the sky, ships at sea, cars on the road, and makes the dream of homeownership possible for millions of families.

This is an awesome responsibility. Collectively, people and businesses will pay an estimated $330 billion in property-casualty insurance premiums this year to persuade insurers to worry about a wide variety of problems, big and small, that theyd rather not think about. (Paying for damage from terrorist attacks, for instance!)

Making sure they get the right coverage at the right price is the responsibility of agents and brokers. When coverage suddenly becomes more expensive, more restrictive and in some cases unavailable–as is expected to be the case in the wake of the Sept. 11 attacks–the job of a producer becomes much more difficult.

While it is insurers and reinsurers who impose restrictions on coverage and raise the rates, the difficult and thankless (but indispensable) job of explaining the changes is left largely to producers.

With respect to the events of Sept. 11, producers must get customers to understand that while insurers are generally eager to seek out new risks wherever and whenever they arise, often on very favorable terms for the policyholder (as was the case during the soft market of the 1990s), insurance markets are occasionally so traumatized that the willingness to absorb certain types of risk disappears.

The terrorist attack of Sept. 11 was clearly such an event. With our nations leaders warning that additional attacks are all but certain and with an open-ended armed conflict under way, insurers and reinsurers around the globe have understandably become reluctant to include coverage for terrorist acts in the policies they sell to their customers in the United States.

Offering such coverage, in the view of many insurance companies, would be equivalent to selling insurance on a house that is already on fire.

Informed customers might be aware that insured losses in the Sept. 11 attacks could exceed $40 billion, nearly three times the $15.5 billion insurers paid to rebuild South Florida in the wake of Hurricane Andrew.

While few clients are likely to shed tears for the insurance industry, producers should emphasize that it is not the enormity of the losses that has caused certain insurance markets to shrink. The decision by insurers to exclude or severely limit coverage for terrorist acts is the rational economic response to the unbounded uncertainty over the number and cost of future attacks.

Insurers are justifiably concerned that additional attacks of a similar magnitude or a sequence of attacks could deplete the industrys capital and lead to a major solvency issue.

Customers in urbanized areas, especially those in larger cities with facilities in landmark structures, are likely to understand the additional risk and financial burden terrorism imposes on a business. These clients have probably tightened their own security and changed certain operating procedures, incurring significant costs as a result.

Rationalizing price increases and terrorism exclusions to a client in Midtown Manhattan or the Chicago Loop is one thing; it is quite another to convince a client in Boise, Idaho or Lafayette, La. But as citizens of the United States, we have necessarily come to accept the common-sense notion that we face the risk of terrorism as a nation, not as individuals. Our concept of national security was changed irrevocably on Sept. 11. We now live in a riskier world and must be willing to accept changes in the way we manage that risk.

The insurance industry is working hard to find a way to provide coverage for terrorist attacks. A variety of proposals that establish the federal government as a reinsurance partner have been discussed.

The case for the federal government as a financial partner is based on sound economics. Businesses unable to transfer risk–or concerned that insurers wobbly finances will lead to insolvencies and the nonpayment of claims—will likely become more cautious and will cease or reduce operations and scale back plans for expansion.

Paralyzed by fear, the cumulative impact of a crisis in confidence would be economically devastating. A federal backstop provides the necessary level of confidence businesses deem necessary to proceed with these plans.

Formally establishing the federal government as a financial partner is also an affirmation of the obvious public policy fact that in the event of another massive terrorist attack, the government will wind up paying much of the tab anyway.

Producers will likely need to combine the patience of Job with the diplomatic skills of Henry Kissinger when it comes to explaining and placing coverage for clients over the next few years. Nevertheless, we now live in a riskier world and must be willing to accept new methods for managing that risk.

Robert Hartwig, Ph.D., is vice president and chief economist at the Insurance Information Institute in New York. He can be reached at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 29, 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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