REPERCUSSIONS OF 9/11
By Roland L. Enz - President, California Plus Insurance Services, Inc.

The economic fallout of the Sept. 11th terrorist attacks on the World Trade Center and Pentagon continues to unfold. Each day brings a new revelation. 10,000 businesses closed - from the flower vendor in the lobby to relocation services in San Francisco. Up to 1.6 million jobs will be lost as a direct result of the attacks. New York City will suffer the most job losses, nearly 150,000 fewer than it was expected to have in 2002. The second-worst hit will be Los Angeles, with a predicted loss of 69,000 jobs, followed by Chicago losing 68,000 jobs.

The travel and entertainment industries were the hardest hit. Aerospace, airports and financial industries follow. As a percentage, Las Vegas will suffer more than any other city. They will have 5% fewer jobs. Myrtle Beach, SC is second with 3.6% less and New York City with a decline of 3.4%. The remaining top ten cities hardest hit include Reno, Atlantic City, Orlando, Wichita, Flagstaff, Honolulu and Fort Worth.

Since September 11th, the California economy has suffered. The overall job loss in California will be 210,000. Not since the demise of California’s aerospace industry have we seen these numbers.

The financial loss, that loss which will affect the insurance industry, continues to rise. Initial estimates of loss were $35 billion, now it’s $70 billion. Many estimates are over $100 billion dollars. The physical loss to the two trade center towers is $7.2 billion dollars. The insurance industry states that it has the ability to handle the losses associated with 9/11. The concern now is future terrorist attacks. The reinsurance industry is pushing for federal terrorism reinsurance. The discussion revolves around the absorption of loss by both the reinsurer and the federal government. As with all legislation, it will take time.

Many states, through their insurance departments, have mandated that insurers cannot exclude terrorism coverage. Commenting on this subject, Scott Edelen, California Department of Insurance Deputy Commissioner said, “that such terrorism exclusion language runs the risk of being too broadly interpreted and could possible permit insurers to disallow coverage for hate crimes."

Litigation will consume even more. Property and causality, disruption and loss of use, life and health, disability and workers comp; all aspects of insurance coverages are being stressed.

2001 was a catastrophic year for the insurance industry, not withstanding 9/11. The year included major losses from natural occurrences to airplane crashes. 2002 has started badly with the Enron debacle, the largest bankruptcy in the nation. What stress could a bankruptcy have on the insurance industry? Surety providers will write off as much as $800 million. Worker’s Compensation claims will be monumental. Suits against management, officers and directors by disgruntled employees and stockholders will exist. Retirement fund managers will have to defend themselves. The only beneficiary out of all of this will be the legal system, again, paid for by the insurance industry. Arthur Andersen, consultants and auditors to Enron, will be under attack. Liability will be assessed and, again, the insurance industry will suffer.

In regards to the immediate future, most insurance premiums will continue to rise. Truck rates have increased 20-25%. Passenger auto rates have gone up substantially. Commercial property will see a 40% increase in rates. Worker’s Compensation rates continue to increase - the truckman classification by as much as 40%.

Worker’s Compensation deserves its own paragraph. Ever since Worker’s Compensation was deregulated with open rating, the industry has lost money. Compensation insurance carriers have faced severe losses, including insolvency; others have fled the state or simply stopped writing business. Many companies foolhardily believed they could make up for the losses with more volume. Worker’s Comp. is unique in that it has no tail. Unlike most insurance policies that have a defined policy period and set limits, Worker's Comp. losses can continue long after the policy has terminated or expired.

The insurance industry, like the U.S. economy, is being tested. We are in a recession; the events of September 11th only compounded the problem. Economic pundits predict that this recession will be short lived and that recovery will start in the second half of 2002. I hope they are right! If you have any comments or if you would like to discuss an insurance question, I can be reached through California Plus Insurance Service at 1-800-699-7101.