Kurt Karl Presentation Dec 0704
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Transcript of Kurt Karl Presentation Dec 0704
Slide 1
The Cost of Terrorism: Insurance issues and TRIA
Kurt KarlSwiss ReEconomic Research & Consulting
GlobalInterdependenceCenter Conference Dec., 2004
Slide 2
Introduction Frequency and severity of global terrorist attacks
The insurance industry & how it works
What is insurable?
The Terrorism Risk Insurance Act (TRIA)
TRIA benefits
Conclusions
Slide 3
Total International Terrorist Attacks: Frequency is trending downward
0
100
200
300
400
500
600
700
1982 1987 1992 1997 2002Terrorism Column 2
Source: Patterns of Global Terrorism, US State Dept.
Number All of decline from 2001 to 2002 due to Latin America
Slide 4
Insured catastrophic terrorism losses 1970–2003: Severity is up
0
5000
10000
15000
20000
1970 1975 1980 1985 1990 1995 2000Terrorism losses Column 2
Source: Swiss Re, sigma No. 1/2004
Property and business interruptionUSD mn, at 2003 prices
Slide 5
Property30%
Other Liability12%
Life3%
Business Interruption
33%
Event Cancellation
3%
Workers' Comp6%
Aviation Hull2%
Aviation Liability11%
9/11 consensus loss estimates: $32.5 billion in total
Source: Insurance Information Institute (III)
Slide 6
Insurance pricing cycle is determined by flow of capital into and out of the industry, “capacity”
Insurance industry has limited capacity. – Commercial property insurance, $49 billion
premiumis in 2003 – Workers compensation $48 bn.– All of commercial, including liability, $237 bn.
9/11 loss was a major strain on the US insurance industry
Insurance industry does not have the capacity to insure catastrophes like 9/11 on an ongoing basis
The insurance industry
Slide 7
143
17 132
42
Personal lines
Financial +A&H lines
Commerciallines
Reinsurers *
*) excluding National IndemnitySources: A.M.Best, Swiss Re Economic Research & Consulting
Distribution of P&C capital matters…
Surplus 12/2003$330.5 billion *
US P&C surplusin $ billions
segmented by dominate business lines
$132 surplus back comml’ lines that are covered by TRIA
Covered by TRIA
Slide 8
Very problematic, according to a Rand Study:– Very large losses, that may happen rarely,
requiring reserves be built up and held over long period of time
– Difficult to predict type and frequency of attacks
– State governments might impose restrictions on coverage and rates
– Difficult to spread risks across large base of buyers
Is terrorism insurable? - 1
Source: Lloyd Dixon, et. al. “Issues and Options for Government Intervention in the Market for Terrorism Insurance,” Rand occasional paper, 2004. [Swiss Re one of ten sponsors of these terrorism studies.]
Slide 9
Not measurable: cannot estimate severity or frequency. Models do exist, however, based on “Delphi” methods.
The size of the maximum possible loss is beyond reasonable calculations (eg, a hijacked aircraft crashing into a nuclear power station)
Excessive adverse selection, only terrorist targets want insurance.
Difficult to diversify the losses since terrorist actions can be co-ordinated throughout the world. Risks correlated.
The business is probably not economically feasible
Hence, there would be little insurance capacity provided
Is terrorism insurable? - 2
Sources: Swiss Re, “Insuring the uninsurable,” sigma 1/2005, forthcoming.
Slide 10
Terrorism Risk Insurance Act (TRIA) Foreign terrorist act only, not domestic Insurance industry aggregate retention is $12.5bn
in 2004 and $15bn in losses 2005 Only support 90% up to first $100 billion, after
deductible, nothing after $100 bn Excludes: personal lines, assumed reinsurance,
federal crop, med-mal, flood, L&H, and other lines Insurers must provide coverage (46% of companies
buy it) Conclusion: not a particularly generous package for
insurers
Slide 11
Other government solutions: Pool Re in United Kingdom Pool Re, since 1993 (post-IRA attacks), insurance
cover for damage and loss caused by terrorist actions
– Terrorism cover became unavailable Pool Re functions as a reinsurance company
Government provides reinsurance to Pool Re. Premiums paid into Pool Re and accumulate
– £100,000 deductible– Government funds have not yet been tapped
Other countries with govt-sponsored terrorism coverage or reinsurance: Australia, Austria, France, Germany, Israel, South Africa, Spain
Slide 12
TRIA results - 1
Estimates were $15 bn lost construction one year after 9/11 (Real Estate Roundtable survey).
– lack of insurance coverage and banks refusing to lend
– TRIA passed Nov. 2002 and fixed this problem
In economics, we called this a market failure– Government action can rectify such failures – Commercial construction was up 5.7% year-over-
year in September
Slide 13
Glenn Hubbard (former head of Council of Economic Advisors for Bush) estimates that without TRIA:– Lose $53bn, or about 0.5% of total output
(GDP)– 326,000 less jobs
Estimates of premiums for terrorism insurance plus cost of self-insuring range from $1 billion to $10 billion ($10 billion estimate from Insurance Information Institute)
Gain for the economy = $40 bn from TRIA
TRIA results - 2
Source: Glenn Hubbard & Bruce Deal, “The Economic Effects of Federal Participation in Terrorism Risk,” Analysis Group, Sept. 14, 2004.
Slide 14
Terrorism cannot be insured by the insurance industry alone, maximum loss is too large. Government involvement is required.
TRIA is cost-effective
TRIA is not particularly generous to the insurance industry — Pool Re in UK is more generous (eg. lower deductibles)
Conclusion: TRIA should be renewed, with the addition of Group Life as is currently being proposed.
Conclusions
Slide 15
Comments & Questions
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