By Gustavo Capdevila
GENEVA, Sep 9 2002 (IPS)

Executives of insurance companies, which lost a combined 40 billion to 50 billion dollars as a result of the Sep 11 attacks in the United States last year, say they will only be able to confront the risks posed by terrorism if they have government backing.

Terrorist acts present risks “that go beyond the capacity of private solutions,” says Patrick M. Liedtke, secretary of The Geneva Association, an international organisation of industry executives that is dedicated to studying risk and insurance economics.

“The ultimate uninsurable risk has to be borne by society because insurance can only operate within the limits of insurability,” Liedtke noted in the presentation of a multi-author study of the economic consequences of the Sep 11 destruction on the insurance industry.

The insurers, which in recent decades had promoted the global liberalisation of all facets of the business, are ready to take a step back from that effort to demand some support from the public sector.

Liedtke and researcher Christophe Courbage stressed that the state “as insurer of last resort” can benefit the functioning of the insurance market.

The two experts even suggest that a government’s role should not be limited to claims related to acts of terrorism, but should also extend to coverage in cases of extreme natural disasters.

The worst scenario would be if the risks associated with acts of international terrorism were left without adequate insurance coverage, said Michael Wolgast, chief economist of the German Insurance Association (GDV).

The result would be a serious blow to the efficiency of the economy, particularly for the assumption of risk by businesses, which is a crucial element of innovation, structural change, growth and employment, stated Wolgast.

“The global insurance industry is in good shape,” says The Geneva Association report.

As of July 2002, no primary insurers had failed, and only one reinsurer, the Japan-based company Taisei, went bankrupt, though mostly as a result of its “over-exposed position in the aviation reinsurance market,” said Robert Hartwig, of the Insurance Information Institute, headquartered in New York.

“The fact that so few insurers became insolvent was due to one factor: spread of risks,” Hartwig said, pointing out that 119 insurers worldwide, including non-life, life and reinsurers, had publicly announced in July their exposure resulting from the Sep 11 attacks.

The company that was hardest hit by claims in the wake of last year’s terrorist strikes was Lloyds, a British consortium, with 2.9 billion dollars, followed by the world’s leading reinsurance firm, Munich Re, with 2.4 billion dollars, and the number-two reinsurer, Swiss Re, with 2.3 billion dollars in claims.

But it is not only the losses from Sep 11 that complicate the global insurance system. The industry also suffers the consequences of the stock market crises in the biggest international markets.

The decline in share values had begun in March 2000 and plummeted after the terrorist strikes against the World Trade Centre in New York and the Pentagon, which houses the U.S. State Department, in Washington.

The losses recorded by stock exchanges during the last two years increased by more than 40 percent. In general, insurance companies place their reserves in stocks.

The damages resulting from Sep 11 for the insurance companies, which various calculations place at 40 billion to 50 billion dollars, surpass any individual disaster in the history of the insurance industry.

In 1992, Hurricane Andrew killed 38 people in the Bahamas and the United States, and cost the insurance sector some 20 billion dollars.

Insurance experts note that the price of a catastrophe is more closely related to the level of development of a country and the level of wealth and number of insured individuals than to the number of victims.

Bangladesh was hit by a cyclone in 1970 that killed 300,000 people, but cost insurance companies nothing. In contrast, the death toll for Sep 11 is estimated at 3,050 to 3,500 people, but it was the costliest disaster for the insurance industry.

A recent study by Munich Re shows that in industrialised economies, insurance payments associated with major disasters “typically amount to 62 percent of economic losses.”

But in developing countries an average of just six percent of such losses are recovered through insurance.

In the history of insurance, there is only one case that exceeds the total losses from Sep 11. It is the industry’s long- term asbestos liability, which is estimated at 60 billion dollars and was incurred over many years from hundreds of thousands of claims.

Insurance expert Hartwig warns that “another terrorist attack of a magnitude similar to that of Sep 11, 2001, would seriously destabilise the global non-life insurance industry and could push a significant number of insurers into insolvency.”

The industry and top U.S. officials believe that a government “backstop” is necessary for insurers because their capacity is finite, “while the loss potential from a terrorist attack is virtually unlimited,” he said.

Alan Greenspan, chairman of the U.S. Federal Reserve (central bank), says, “The viability of free markets may, on occasion, when you are dealing with a degree of violence, require that the costs of insurance are basically reinsured by the taxpayer.”

Prior to Sep 11, some countries — such as Britain, Israel, South Africa, Spain and Sri Lanka — already had legislation in place for government backing of insurance in cases involving terrorism. France and Germany have since followed that model.

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