Canadian Underwriter
Feature

The Risk of Terror: The Shadows of Disaster


October 1, 2001   by Linden Rees, president of Insurers Security Services Inc.


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There appears to be more to the story behind the tragic events of terror which took place in the U.S. on September 11 of this year than what the mainstream media initially reported. It now seems that stock markets may have been manipulated by the financial tentacles of what was obviously a well-planned conspiracy, prior to the onset of the cataclysmic events themselves.

Securities authorities are said to be looking into the possibility of terrorist groups, or their contacts, dealing in the short-selling of shares and/or options markets. Scanning the press, it is apparent that there was, just days before the attacks, massive trading in the shares of certain large reinsurance companies such as Swiss Re, Munich Re and Axa Re. Whatever the reason and origin of such trading, shares of many leading reinsurers fell dramatically. Was this a way for the perpetrators to gain from their heinous crimes by ” selling high and buying low”? Only time and investigation will tell, but such a nosedive in these equities, in the absence of a credible explanation, may well serve as a rational indicator that something untoward may have been in the offing.

To the word

During the Second World War the U.S. Government became aware of the potential “gaps” in high-risk insurance coverage. The “War Damage Insurance Corporation” was created in response. Similar to today’s U.S. Federal Flood Insurance plans, this programme provided catastrophic loss coverage after private insurers had covered the first layer. It is perhaps a sign of the times that such coverage, apart from the current congressional appropriations, fell this September upon private insurers and reinsurers. Whether this was due to the vastly increased financial resources of the global insurance market, the industry can only speculate.

Although most American primary insurers do cover losses resulting from terrorist acts, there is the issue of “act of war” exclusions which at least some reinsurance and insurer policies will have held. Market talk has it that several U.S. reinsurers are standing steadfastly to this ruling. But, it is notable to refer to a 1974 Federal Appeals Court decision pertaining to the terrorist hijacking of a Pan Am aircraft which held that the event did not qualify under the “act of war” exclusion. It is also interesting to note that the war exclusion clause in life policies ensures that, although benefits will not be paid in the event of a war related death, there is provision for either a return of premiums plus interest, or a refund to the estate, equivalent to any cash value in a whole life policy.

Fair perspective

Insured victims/beneficiaries of the terrorist attacks will be greatly relieved by the fact that most companies operating in the property and casualty insurance industry have elected not to invoke “act of war” exclusions. Whether this is due to the message sent by the courts in 1974, or the desire to be good “corporate citizens” will not matter to those in need.

But, from an insurance industry perspective, if U.S. president Bush’s constant references to “an act of war” are combined with the very real assertion that a sovereign state has, by sheltering the culpable parties, become equally culpable, then it may be that payout will become only an arbitrary decision for the insurance community to make alone.

It is noteworthy that certain primary insurers have already decided to commence claims settlement in this early phase. I wonder, however, whether their reinsurers will follow suit? Either way, if insurers pay out, the insureds, both commercial and individual, may yet have to consider any future rebound effect.

It is strongly suggested that, in light of the horror visited upon the U.S., insurers at all levels would be well advised to hold good to their declarations to date and, if rate increases are necessary to offset these enormous losses, they may be amortised with the risk spread fairly.