I September 11, 2001 The events of September 11, 2001 are widely acknowledged as ‘events that changed our lives and world forever’. Our world was to change not because of any new threat but because an old threat was to re-emerge into our lives, having reinvented itself, and remodelled itself in such a way that was unforeseen and unquantified by the men and women who lead our nations.
Terrorism is not a new threat but the nature of this new breed of terrorist is, as they have evolved into something so horrific and so bent on hatred and destruction that they are simply unable to tolerate any of the previous boundaries of humanity that were considered by the generations of terrorists before them.
“Before Al Qaeda, never before had there existed a terrorist organisation that possessed the ruthless ideological intent to cause maximum loss; the trained personnel and logistical capability to launch spectacular suicide attacks against western interests; and the patience in undertaking surveillance to identify and exploit defensive weakness.” 1 Overshadowing this was the blatant disregard for human life that had not previously existed in terrorism groups such as the IRA who had shown the capability to exploit opportunities to launch attacks on the British mainland such as the bombing of London and the Lockerbie Air crash but were simply unable to maximise casualties in human loss and to prevent this issued vague telephone warnings in which details of the attacks were given to authorities by the terrorists.2
“For Al Qaeda, martyrdom missions are the standard means of prosecuting the Jihad. There are no moral constraints on Al Qaeda attack; no concerns for the lives neither of the operatives, nor for the number of their victims, some of whom may well be Muslims. The robotic calculated rationality of Al Qaeda decision-making allows attack decisions to be optimized, like moves on a chess board, without the emotional interference of moral concerns over human welfare.”3
These people, these practices and these events that they caused have rewritten insurance industries policy, government legislation and business practice around the globe and changed all of our lives forever.
A The Events Much has been written and we’ve all seen the footage of that horrible day when four airliners were hijacked as they left their respective airports of Boston, Massachusetts, Newark, New Jersey and Washington, DC bound for their respective destinations unbeknown to anyone on board that there were 4 or 5 hijackers of middle-eastern appearance about to brandish their own insane destruction on the world. These hijackers with ‘military precision’ took over these planes killing the crew and gaining “control of what amounted to four guided missiles, brimming with tens of thousands of gallons of jet fuel”.4 At 8.46 am, the first plane, an American Airlines flight 11, that had originated in Boston and was bound for Los Angeles slammed into the North Tower of the World Trade Centre in Lower Manhattan. Seventeen minutes later while the world watched their television screens, at 9.03am a United Airlines flight 175 also from Boston bound to Los Angeles crashed into the south tower of the World Trade Centre. At 9.43am, a third hijacked plane American Airlines flight 77 from Washington to San Francisco slammed into the Pentagon. Meanwhile brave passengers on the last hijacked plane, United Airlines flight 93 from Newark to Los Angeles, prevented the hijackers from overtaking the plane and instead caused the plane to crash into a paddock in an area south of Pittsburgh, Pennsylvania at 10.10.am This action prevented the plane from reaching its target destination which was believed to be the ‘White House’.
At 10.05am having suffered considerable damage to its structure and engulfed in flames the South Tower of the World Trade Centre collapsed as did the North Tower at 10.23 am killing all of the people trapped inside the building and almost all of the 400 fire-fighters and police officers attempting to save their lives. The collapse of the North and South Towers caused the fire to spread, and this combined with the force of the impact of both buildings collapsing caused significant damage to surrounding buildings and shrapnel to rain down on a wide area of Manhattan.5 “A dense cloud of acrid, black smoke shrouded much of lower Manhattan, plunging in into a toxic darkness. A thick coating of fine grey ash and pulverized concrete settled over much of the area, infiltrating thousands of homes, businesses, machines and countless pieces of equipment.”6 The greatest tragedy in the history of the world to date had been man made only to be outdone in recent years by the events of hurricane Katrina in New Orleans.
The tally of losses is best described by Robert P. Hartwig, Senior Vice President & Chief Economist of the Insurance Institute who was also an eye witness to the events of September 11 as;
“Within a span of less than 100 minutes, more than 3,000 people had been killed and 2,500 injured. Two of the world’s tallest buildings had collapsed and 16 square acres of some of the most valuable real estate on earth - 26 percent of all the office space in Lower Manhattan (31 million square feet) - had been reduced to rubble. Moreover the Pentagon had sustained serious damage and four large commercial aircraft had been lost”. 7 The cost in human tragedy alone is as follows;8 WTC Victims (workers and visitors) 2666
WTC hijacked jets (incl. 10 hijackers) 157
Pentagon victims on the ground 125
Pentagon hijacked jet (incl. 5 hijackers) 64
Pennsylvania jet crash (incl. 4 hijackers) 44
B The Fallout September 11, 2001 produced insurance losses estimated at $32.5 billion calculated in 2001 dollars; the cost in human life was as detailed above an estimated 3056 people who came from 909 different countries around the globe; the injuries were estimated at 2250 people.10 This insurance loss affected nearly 150 insurers11the most significant effect being on the European Reinsurers who absorbed two thirds of the insurance cost of 9/11.
According to the Insurance Institute the estimated effects on the various insurance lines was as follow;
Business Interruption Insurance – $11 billion or 27%
Liability Claims – $10 billion or 25%
Property claims for buildings other than the WTC and including motor vehicles – $6 billion or 15%
Property claim for the WTC buildings 1 and 2 - $3.5 billion or 9%
Aviation Liability - $3.5 billion or 9%
Life insurance Claims - $2.7 billion or 7 %
Workers Compensation - $2 billion or 5%
Event cancellation claims - $1 billion or 2%
Hull claims for the loss of the 4 commercial aircraft – 500 million or 1%12
The event, according to Researchers in Risk Management, Ermann Michel-Kerjan and Burkhard Pedell13 demonstrated the possibility for highly correlated risk at different levels.
“First, multiple lines were affected instantaneously by 9/11 such that commercial property, business interruption, workers compensation, life, health, disability, aircraft hull and general liability lines each suffered catastrophic losses.
Secondly, there is now a well-recognised possibility for several catastrophic attacks to occur simultaneously in different densely populated or industrialised locations. Hence, this event confronted the insurance and the reinsurance industries with an entirely new loss dimension”14 In addition to the estimated insurance loss there is also a total estimate economic loss of $83 billion in New York City alone.15 This includes damage and injuries to those who were not insured, underinsured, businesses faced with insurability or retentions and coinsurance provisions. It also includes loss of business income and tax revenue, and additional costs involved in dealing with the disaster like the cleanup costs. Finally there was the effect of other losses including the community where it was estimated 125,000 people lost their jobs in the fourth quarter of 2001. This number was to improve but by 2003 this loss would still be 57,000.16 The government contributed $20 billion in aid to New York while charity aid gave 1.5 billion. 17
C Insurance, Litigation and the World Trade Centre
On the 26 of April 2001 the Board of Commissioners of the Port Authority of New York who had previously built the World Trade Centre (WTC) and had since managed it as a public resource awarded Silverstein Properties and the mall owner, Westfield’s America a 99 year lease on the complex.th The new owners acquired along with the assets an insurance policy for the complex that included a clause that in the event of a terrorist attack that the partnership could collect on the insured value of the property, and be released from their obligations under the 99 year lease.18 The lease deal did not close until the 24 of July 2001 just 6 weeks before the attacks on the WTC. By December 2003 the Port Authority had agreed to return all of the $125 million in equity paid by the consortium to purchase the complex back.th Silverstein Properties took action in addition to receiving this money against its first party property insurers for the destruction of the complex. These insurers of which there were 25 providing multi-layered insurance coverage at this stage were only bound by an interim policy (i.e. binders). This multi layered insurance program provided for a total ‘per occurrence’ limit of indemnity of US$ 3.5468 billion. The crucial issue before the courts would be whether the events of 9/11 constituted one or two occurrences and therefore whether the insurers had to pay $3.5468 cap on the buildings once or twice.19 The court battles were set in 3 stages. The first court battle ended in May 2004 and found that 15 of the insurers were bound by a specimen property insurance form (now known as the WilProp) that had been issued by Silverstein’s Consortium Broker – Willis. This form stipulated a maximum or ‘aggregate’ limit of indemnity which the insurers must pay for damage caused by a ‘single occurrence’. The advantage of this clause was that it limited both the insurers’ exposure to loss and also the insured excess to one payment. The WilProp form defined the word occurrence as;
“Occurrence shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of the losses will be treated as one occurrence irrespective of the period of time or area over which losses occur” 20 The outcome saw the court find that there had only been one occurrence and therefore limited the indemnity for the insurers to one payment.
The second round of court battles which ended on the 6 December 2004 was decided with reference to the New York’s common law as the other party Travelers Insurance, the lead underwriters of the nine other insurers, had rejected the Wilprop Form and offered its own specimen insurance form in which it omitted to define the word ‘occurrence’.
The jury in this case found that in fact two aircrafts had impacted into the twin towers, resulting in two fires and two building collapses and that these were two separate occurrences, which meant these insurers were liable to pay the maximum limit of their indemnity twice.th The third phase of the WTC litigation was the appraisal of the WTC’s value as at 9/11. The appraisal involved an ‘arbitration like’ process whereby the appraisers for the Silverstein parties and the insurers negotiated the value of the loss before a neutral umpire.21 The lesson from the WTC litigation was “that all parties to an insurance contract should endeavour to secure contractual certainty as soon as possible.”22 II Terrorism Insurance Prior to September 11, 2001 Dating back to the 18 centuryth property casualty insurance provided protection for “all names peril”. This meant that insurance coverage was provided for items specifically listed on insurance policies. During the 1930’s this changed from being cover for all “named peril” to covering “all peril” except those specifically excluded from policies such as “acts of war”. The exclusion of war risk has been found in virtually all nonlife insurance contracts since the 19century and reflects the realisation that the resultant damage is fundamentally uninsurable.th Property and casualty insurance premiums prior to 9/11 were either ‘silent’ with regard to terrorism insurance or included it as an ‘unnamed peril’23 in all standard ‘all risk commercial policies’ and in ‘home owners’ policies as ‘general property or casualty policies’ which covered damage to property and its contents. It many instances it was provided effectively free of charge24 or listed as an inclusion in the policy at a relatively inexpensive rate of insurance.
The market for this type of insurance (property and casualty policies including acts of terrorism) prior to 9/11 could be generally described as liquid and readily available at highly competitive premiums.25 This was even considering the previous terrorist attack on the World Trade Centre in 1993 and the Oklahoma City Bombings in 1995. It is fair to say that “never before had it been perceived as a political risk by underwriters, nor been priced by actuaries, as a genuine catastrophic risk.”26 III The Fallout of 9/11 in the USA The greatest impact of all was felt in the US insurance market although the effect of 9/11 rippled around the globe. It is important to remember that it was the European reinsurers who footed the bill for two thirds of the $32.5 billion insurance bill.
A The Effect on the Insurance Industry Insurers and reinsurers post 9/11 were quick to assure the market of their ability to cover the costs of these attacks. They were quick also to dismiss the actions as an “Act of War” which would have meant that the insurers and reinsurers were not liable for these costs under their insurance contracts. The view held by many was that had the insurers attempted to claim the act as an ‘act of war’ that it would not have stood up to a court challenge.
Hence in the aftermath of Sept 11, primary insurers found themselves with;
significant exposure to terrorism insurance risk within existing portfolios;
limited possibilities of obtaining reinsurance to prevent losses from future attacks as the reinsurer were more able to exit the market;
the continued uncertainty and possibility of future attacks; and
the inability to determine the potential size of these attacks or their nature:
Faced with these issues, insurers determined that “terrorism was an uninsurable risk” and followed reinsurers from the market for terrorism insurance. For the reinsures leaving the market was much easier as unlike primary insurers, reinsurers are not governed by legislation and form part of global market for funds regulated by contract law which typically have contract periods of 1 to 2 years which generally have expiry / renewal date in either July or January.
In comparison the primary insurance market in the USA is one of the most highly regulated in the country and is individually regulated in each State. In October 2001, the Insurance Industry Office (ISO) on behalf of the industry filed requests in every State office to exclude terrorism coverage from all commercial insurance policies. In early 2002, this had been permitted by 45 states the only exception being workers compensation coverage. Thus by 1 August 2002 most insurance firms had fled the market.st The few insurers that did provide cover to clients did so at extraordinarily high prices. For example Chicago Airport prior to 9/11 carried $750 million of terrorism insurance at an annual cost of $125,000, after 9/11 their insurer would only offer them $150,000 million of cover at an annual cost of $6.9million.27 By September 2002 very few businesses across the US had terrorism insurance.
As the insurers left the market the fundamental risk of any future terrorist attacks fell on the people would have been the subject of the attack, the businesses and their employees, lenders, suppliers, and customers.
The impact on business and the economy is well documented. Lenders and investors stopped lending money as the cost of these loans and interest rates did not historically factor in the risk that asset that they had lent money on could be destroyed by an act of terrorism and they like their client would loose their money as there was no insurance available. As lender were exceedingly uncomfortable with this increased exposure they stopped lending money especially in high risk areas or projects they judged to be high risk thus halting or delaying many projects. The airline industry already in trouble and now facing ruin successfully partitioned Congress and the Bush Government for a Federal payout of $5 million in cash grants, $10 million in loan guarantees and established an open ended tax payers fund to compensate and pay claims against victims and their families killed in the tragedy, but more significantly to reimburse the airlines for increased costs of their insurance premiums.28 The market for stand-alone terrorism insurance grew. Prior to 9/11 this had been a market of last resort mainly used by companies wishing to invest in high risk terrorist countries such as Columbia, Sri Lanka and Algeria. Lloyds and AIG typically providing cover.29 After 9/11, demand for this type of cover substantially increased as companies were able to charge high rates for this product that was fuelled by high demand and this allowed new players to provide insurance to this market.30 In the 12 months after 9/11 the US market contributed to more than 50% of all the worlds’ stand-alone insurance policies.31 The introduction by the US government of TRIA saw the competition in the market increase and overall rates declined by 40-50% with the exception of location hot spots or high risk terrorist strike areas. Stand Alone insurance has continued to develop along side TRIA providing an alternative to the governments package.
IV The Government Introduces Terrorism Insurance - TRIA In November 2002 after much debate the Government provided and today still continues to provide a temporary solution through The Terrorism Risk Insurance Act 2002 (TRIA). This is a public/private risk sharing partnership, whereby the Federal Government and the insurance industry share in any losses that result from a terrorist attack according to a specific formula.32 The initial package was for a two year period but was extended after much debate in 2005 for a further two years until December 2007. Currently a Bill is before Congress to extend the legislation for a further 10 years, although opposition to this proposal is coming from the Bush Administration who will only offer a 2 or 3 year extension and has objected to many of the proposals.33 TRIA is considered successful as it enabled a market for terrorism insurance to develop with the federal backstop effectively limiting the insurers’ losses, and greatly simplifying the underwriting process.34 The intension that it gave insurance companies time to assess their exposure to terrorism losses and learn how to price and underwrite these policies was also achieved.35 Since its introduction there have been a number of modifications and there are even more muted in the current Bill before Congress.
The legislation requires all property and casualty insurers to make terrorism coverage available to all commercial policy holders on the same terms and conditions as if offered in their non-TRIA coverage.36 If the insured rejects the offer then the insurer may then reinstate a terrorism exclusion clause. A business that does not purchase TRIA or any other kind of terrorism insurance will not be covered for damage caused in a terrorist attack. The “make available” provision applies to commercial lines of property and casualty insurance. Insurers can offer this option to individuals if they choose.
The specific provisions of the legislation are;
TRIA covers insured losses for terror attacks on commercial lines of insurance which include property, casualty and business interruption. The attack must result in aggregated property and casualty insurance currently of $100,000 million though the initial trigger is $5 million. To trigger this payment of federal funds the attack must be certified by the U.S. Secretary of State in concurrence with the Attorney General and the Secretary of the Treasury37 as an “act of terrorism”.38 Insurers do not pay the Federal Government for this reinsurance, they are effectively provided with this reinsurance for free.
Not all acts of terrorism are covered by TRIA. Specifically excluded are terrorist attacks involving biological, chemical, and radiological or nuclear weapons of mass destruction (NCBR) Primary insurers are able to include these risks under standard insurance policy but it is not a requirement of TRIA. The current Bill before Congress recommends the inclusion of these as acts of terrorism39 but it is being heavily debated and is opposed by the Bush Administration and the insurance industry.40
TRIA defines an ‘act of terrorism’ currently as being an “act committed by individuals acting on behalf of foreign interests who are part of an effort to influence policy or conduct in the United States”.41 It does not include domestic terrorism so events such as Oklahoma City bombings of 1995 which prior to 9/11 was the most damaging terrorist attack in the USA.42 The 2007 Bill recommends that this distinction be removed.
TRIA requires that each participating insurer be responsible for paying out a certain amount in claims – a deductible- before Federal assistance becomes available.43 These deductibles rose from 15% of the direct commercial property and casualty premiums earned in 2005 to 17.5% in 2006 and are currently at 20%44 which according to research by Dowling and Partners can be quite significant. For losses above the company deductible, the federal government will as of 2007 cover 85%. There is no further expectation that this will change under current proposals.45
The aggregate insurance industry retention is currently $27.5 billion46 having risen from $15 billion in 2005. (24) Under the current proposal it is set to remain unchanged.
Losses covered by the program are capped at $100 billion,47 (though the current Bill recommends reducing this to $50 billion which is opposed by the Bush Administration).48 This means that if the insurance loss in any year exceeds $100 billion then Treasury determines how these additional losses are to be spread between itself and across the insurance industry.49
Lines of insurance currently excluded from the program are: life, health and personal property (auto and home), other less known items include; assumed reinsurance, federal crop, mortgage guaranty, financial guaranty, medical malpractice, flood insurance.50 The current Bill recommends the inclusion of ‘group life insurance’ under TRIA insurances that must be made available by insurers. This is being opposed by the Bush Administration.51