Global terrorism and the insurance industry: New challenges and policy responses

Transcription

1 Global terrorism and the insurance industry: New challenges and policy responses German Insurance Association DIW workshop The Economic Consequences of Global Terrorism,

2 The impact of September 11 on the markets for insurance (I) Major insurance industry losses (estimated 32 to 56 billion USD) Reduction of capacity, substantial hardening of the insurance markets Reaction of the financial markets Initial reaction Regulators adopted wide spectrum of forbearance measures Markets had recovered by the end of 2001 Substantial inflow of new capital into the markets 2

3 The worst terrorist acts in terms of casualties and insured property losses Table 1 Date Country Location Event 11 Sep 01 USA NYC, Wash. Terror attacks against WTC and Pentagon by DC hijacked airliners 23 Oct 83 Lebanon Beirut Bombing of US Marine barracks and French paratrooper base 12 Mar 93 India Bombay Series of 13 bomb attacks 21 Dec 88 UK Lockerbie PanAm Boing 747 crashes due to bomb 07 Aug 98 Kenya Nairobi Two simultaneous bomb attacks trigger damage in and around US embassy complex 19 Apr 95 USA Oklahoma Truck bomb attack on government building in City Oklahoma City 23 Nov 96 Comoros Hijacked Ethiopian Airlines Boing Indian Ocean ditched at sea 13 Sep 99 Russia Moscow Bomb explosion destroys apartment building 04 Jun 91 Ethiopia Addis Ababa Arson in arms warehouse 31 Jan 96 Sri Lanka Colombo Bomb attack on Ceylinco House 18 Jul 94 Argentina Buenos Aires Bomb attack on building of Jewish organisation 24 Jul 01 Sri Lanka Colombo Intl. Airport Rebels destroy 3 airliners, 8 military aircraft and heavily damage 3 civilian aircraft 26 Feb 93 USA New York Bomb explodes in garage of world Trade Center 10 Apr 92 UK London Bomb explodes in financial district 09 Feb 96 UK London IRA bomb attack in South Key Docklands 24 Apr 93 UK London Bomb explodes near NatWest tower (City) Fatalities Injured Estimated economic loss USD m (2001 price levels) Insured property loss USD m (2001 price levels)* * Including business interruption and aviation hull losses. Source: Swiss Re / W.Schaad, (2002, p.3) / Sigma catastrophe database. 3

4 The most costly insurance losses Table 2 Insured loss 1 (in USD m, indexed to 2001) Victims 2 Date Event Country Loss as % of Non-lifepremium volume Hurricane Andrew US, Bahamas 5.0 % Terrorist attack on WTC, Pentagon etc. US 4.1% Northridge earthquake US 4.0% Typhoon Mireille Japan 6.5% Winterstorm Daria France, UK et al Winterstorm Lothar over Western Europe France, CH et al Hurricane Hugo Puerto Rico, US et al Storm and floods in Europe France, UK et al Winterstorm Vivian Western/Central Europe Typhoon Bart hits south of country Japan 3.9% Hurricane George US, Caribbean Tropical storm Allison; rain floods US 0.7% Explosion on platform Piper Alpha UK 5.5% Great-Hanshin earthquake in Kobe Japan 1.9% Winterstorm Martin over South-West France and Spain France, E, CH 1 Excluding liability losses 2 Dead and missing 3 Premiums in 2000, calculated at 2001 prices Source: Swiss Re (2002, p.23). 4

5 Development of major indexes on the stock market in 2001 Table 3 Date DAX DAX Insurance STOXX STOXX Insurance Dow Jones Industrial Average (US) Dow Jones Insurance (US) Source: Handelsblatt, Bigchart. 5

6 Table 4 Global Insurance Markets / Inflow of New Capital (USD million) (as of April 12, 2002) CGNU 1.700D Arch Capital 763S Swiss Re 1.600V XL Capital 600D Axis (Marsh) 1.600S Chubb 600D Ace Ltd S St.Paul 575TP AIG 1.000CD Wellington 564S Montpelier 1.000PE All Others Converium 985S Total Completed Allied World 959S Pending XL Capital 819S GRAND TOTAL Endurance 800V Type of Issuance: CD=Convertible Debt; D=Debt; PE=Private Equity; S=Stock; TP=Trust Preferred; V=Various Source: Insurance Information Institute / Morgan Stanley. 6

7 The impact of September 11 on the markets for insurance (II) Short-term adjustment following September 11 has now to a large extent been accomplished. However, fundamental reassessment of existing assumptions and scenarios: Insurers and re-insurers world-wide cancelled or abstained from renewing existing contracts upon expiration (examples: aviation, industrial property) New terrorism exclusion clauses Insurability of the risks of terrorism? 7

8 The insurability criteria Randomness (of the loss occurrence) Definability of the (maximum possible) loss Assessibility of the probability and severity of losses Independence (of loss occurrences) Size of the (maximum possible) loss 8

9 The new dimension of global terrorism Previously inconceivable scale of threat scenarios and loss potentials Formerly predominantly a national concern (UK, Spain, Israel), has assumed new international dimension Terrorist organisations have greater access to extremely effective and lethal weapons. Size, complexity and vulnerability of certain targets Terrorists will be ready to sacrifice their own lives. 9

10 In sum, from the standard textbook insurability criteria, the unambiguous conclusion would be that in the case of terrorism, like in the case of war or other types of social disruption, the associated risks can hardly be (entirely) covered by private sector insurance. 10

11 The social cost of uninsured risks Economic importance of insurance: Reduction of risks in the process of production Enables risk-averse entrepreneurs to take on new entrepreneurial risks Uninsured risks provide negative spill-overs for economic activity, imply a set-back in terms of economic efficiency Theory of public goods, role of implicit solidarity: A case for public-sector intervention 11

12 Model solutions for public-sector intervention Credit guarantees, fiscal incentives Complete absorption of risks of terrorism by the state Management and settlement of claims? Burden-sharing between private insurance (fed through premium income) and the state? Limitations for government guarantees? Mandatory insurance? Restrict public intervention to a certain time period? Model solutions along these lines in place in many countries (UK, Spain, South Africa, N. Ireland, Israel, France). 12

13 Global terrorism and the insurance industry: New challenges and policy responses German Insurance Association DIW workshop The Economic Consequences of Global Terrorism,