GUAA Risk Review

GUAA Risk Review, Fall 2002

Group Life Committee Review

By Joe Malone
Munich American Re

Here is an overview of a very informative workshop presented by the Group Life Committee at the GUAA Annual Conference in Washington, DC:

Group Insurance after September 11th - How has it changed?

Joe Malone of Munich American Re provided an overview of the impact of the tragic events of September 11 on the insurance industry and it's future. September 11th was the largest disaster in history for Life Insurers and Workers' Compensation Insurers, with the current total estimated industry loss in the range of $30 - $70 Billion. The probability of another terrorist incident is high, according to many experts, risk managers and Warren Buffett. However, insurers and reinsurers are no longer financially able to offer coverage for terrorism, as they have in the past. The insurance and reinsurance industries have been able to pay all of the claims resulting from September 11th, but they probably cannot weather a similar, or more devastating, terrorist incident. Insurers cannot price and absorb an infinite risk with their finite resources. It is vital that the U.S. Congress enact a federal backstop to restore predictability in the insurance marketplace. Certain segments of the reinsurance market have tightened, with capacity limited and prices significantly higher. Catastrophic Reinsurance is no longer available with broad coverage and cheap prices, and this has significant implications for those companies that are selling Group Life & AD&D Insurance coverages.

A panel of three industry experts provided their insights into the impact of September 11th on Group Insurers and the Reinsurance Marketplace and how the Insurance Industry is responding.

Mark Andruss of Fortis Benefits Insurance Company shared his company's perspective on the events of September 11th. He outlined the recent efforts of Fortis, other insurance companies, and industry associations to bring the message of the need for a federal backstop for the Group Life Insurance Industry to the attention of the public and to the U.S. Congress. A coalition of 19 Group Life Insurers and Reinsurers, spearheaded by Fortis and UnumProvident, has been actively lobbying the NAIC and the U.S. Congress for a federal backstop. In November 2001, the U.S. House of Representatives passed a bill (HR 3110) that outlined a federal backstop for the Property & Casualty Insurance Industry only, and did not include the Life Insurance Industry. In June 2002, the U.S. Senate passed a bill (S. 2600) that outlined a different federal backstop for the Insurance Industry, but also did not explicitly include the Life Insurance Industry. The U.S. Senate bill did, however, include a requirement that the impact and needs of the Life Insurance Industry be studied. At this point in time, our industry must hope that a number of sympathetic senators and congressmen can influence the final measure, which will be hammered out by the U.S. Congress in a conference committee in the very near future.

Darlene S. Riquier, Director of Ceded Reinsurance for Hartford Life discussed the level and magnitude of STD and LTD Insurance Claims resulting from September 11th. The short-term financial impact has been limited, but the long-term impact is a big unknown. The industry does expect to see an increase in Mental & Nervous Claims and also Post-Traumatic Stress Disorder (PTSD) Claims in the future. Turning to the Group Life & AD&D side of the business, Darlene commented on the necessary return of "Risk Analysis." Hartford Life and other companies are looking across their various lines of business to evaluate their Terrorism Risk and their Concentration Risk. Many insurers are challenged in obtaining concentration of risk data for their exposure in a specific metropolitan area or a trophy office building. Many reinsurers are now standardly requiring concentration of risk data for certain lines of coverage.

George A. Whipple, a Vice President at John P. Woods Co., Inc., is a reinsurance intermediary who has been very busy since September 11th. George described today's Group Reinsurance Marketplace, where the landscape has changed significantly over the last nine months. Catastrophic Reinsurance, or CAT Coverage, has historically been a very affordable backstop for Group Life & AD&D Insurers that has protected them from multiple claims from a single event, such as a plane crash, a fire or an earthquake. CAT Coverage protected the bottom lines of many Group Insurers who incurred claims in the World Trade Center, the Pentagon, and on the planes that crashed that day. However, since September 11th, reinsurers have necessarily limited their exposure in this market, due to the increased risk of terrorism and the lack of a federal backstop. CAT Coverage is now harder to find, the price is significantly higher, coverage maximums are lower, and there are more coverage exclusions. New reinsurance capacity has recently emerged in Bermuda. Reinsurance strategies that Group Insurers are considering today, in the absence of affordable CAT Coverage, are to reduce their Group Life Reinsurance retention and buy more reinsurance protection, purchase more Group AD&D Reinsurance or purchase Group Life AD Carveout Reinsurance.

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