One legacy of the Sept. 11 terrorist attacks likely will be an increase in property insurance premiums for businesses, from 20 to 300 percent. That's if companies can find insurance at all.
New policies most likely will have a terrorist exclusion, which will mean paying extra to get coverage - if it is available - to cover property losses in case of another attack like those that devastated the World Trade Center in New York and the Pentagon in Washington, say local and national insurance industry experts.
“What we've seen in trying to market commercial accounts ... after the attacks is total turmoil. We expect quite a bit in the way of change and impact,” said Bob Hawker, executive vice president of Picton Cavanaugh in Toledo. The commercial property and casualty insurance company is part of the Sky Financial Group.
His company has clients that pay from $1,500 to more than $1 million a year for insurance that covers businesses against building and inventory losses as well as liability costs such as workers' compensation claims. Prices are based on a number of factors, including the size of a building, what materials were used in its construction, and how many workers' comp claims are typically made.
Mr. Hawker said the rates for the property portion of a policy were typically 10 cents per $100 of the value of a building. So, for a building valued at $100 million, a company before the attacks was paying roughly $100,000 per year to ensure the property. “Obviously, if the rate goes to 20 cents per $100, the yearly rate is going to be $200,000.”
All types are businesses, big and small, are likely to be affected, said Patrick Hylant, Sr., chairman of the Hylant Group, a business insurer based in Toledo and with offices in other major Ohio cities.
“Insurance prices are going through the walls and availability is very difficult,” he said. “It was bad before Sept. 11 and [the attacks] just made a bad situation that much worse.
“About 25 percent of the industry surplus was sucked up in one event.”
Insurance prices, which dropped in the late 1980s as more competitors entered the market, started rising last spring. The need for cash by insurers came about because of lower investment returns from a declining stock market and because of higher costs from claims in industries like apartment and nursing home ownership and medical malpractice.
Still, insurers have reserves to pay for the expected losses from last month's terrorist attacks. However, they say they likely could not handle another major event or a series of events.
The Hylant Group has clients which pay $1,000 a year in insurance to ones that pay $30 million because of a number of claims like for workers' comp, Mr. Hylant said.
“I've had clients that have already seen increases from 25 to 300 percent.”
Businesses with less than $1 million in inventory are likely to be hit with a 15 percent to 30 percent increase, said David Sterling, chief executive of Sterling & Sterling in Woodbury, N.Y., while companies in the $100-million bracket will be asked to pay 30 percent to 60 percent more. Early estimates put the amount that insurers will have to pay out because of Sept. 11 at $40 billion, with $9 to $11 billion of that going for property losses.
Such insurance increases will press building owners to raise rents to business tenants, which in turn may have to raise prices to customers.
Adding to the insurance cost problem is that a third of the reinsurance market is expected to disappear in coming months. Reinsurance companies - those that insure the insurers -assume part of the liability for a policy. If just a few companies along the chain can't meet their obligations, all the companies in the interlocking line could face more claims than they can handle.
“The primary carriers are going to have to retain more of each policy's risk in-house, and pay a lot more for the portion they transfer out, and that's going to drive up the costs for the consumer,” said Picton Cavanaugh's Mr. Hawker.
Given how busy insurance underwriters are, Picton Cavanaugh, which usually started the renewal process for a client six weeks to two months before expiration, are now starting the process three to four months before expiration to ensure uninterrupted coverage.
“They are underwriting far more stringently than they did three months ago,” Mr., Hawker said. “They're making sure every I is dotted, every T is crossed, every question is answered.”
Although he knows of no business denied coverage, companies say the price increase comes as the economy slows and profit margins are squeezed, making it tough to afford the higher rates, he said.
But even the insurers are scrambling to try to get help from the federal government in case of future terrorist attacks.
A plan introduced by the government and endorsed by insurers would create a terrorism reinsurance pool as a state-chartered mutual insurance company, to be called the Homeland Security Mutual Reinsurance Co. It would provide reinsurance for property/casualty insurance. There would be a uniform definition of terrorism for all insurance and reinsurance policies sold in the United States.
Each participating insurer would retain 5 percent of the risk of terrorism loss for each policy sold, and transfer 95 percent of the loss to Homeland. Homeland, in turn, would purchase its own terrorism reinsurance from the federal government through the Treasury Department.
Such a pool is needed for insurers to carry on, experts say.
“How many $40 billion dollar disasters can you take? That's what's driving the big push for a reserve,” said Peter H. Calfee, president of Calfee Financial Advisors in Cleveland and an expert on disaster and loss recovery insurance.
He added, “You can't afford not to have insurance companies because that would mean a loss of the liquidity of commerce. If you can't insure an airplane, there'd be no more airlines.”