9/11: Implications for Casualty Actuaries

by Robert F. Conger and Vincent F. Yezzi

September 11 is one of those historical events, along with very few others, for which we will remember where we were and what we were doing while we watched the horrific events unfold. For casualty actuaries, the implications range from the very human to the extremely analytical. Certainly the human toll of the events hit close to home as we realized the number of insurance and other financial organizations housed in the World Trade Center complex; as we tallied the number of actuaries, colleagues, and friends whose offices were in or near the WTC; and as we learned the identities of the September 11 victims. We were saddened to learn that some in our immediate professional community and their family members were among those lost, but we also were grateful for the number who escaped.

Many of our employers and clients also had immediate and practical challenges: locating all of their employees, colleagues, and families; providing grief and stress counseling; getting employees safely home; finding alternative office space; making alternative arrangements for shipping; rescheduling and rethinking future meetings; handling claims, claim payments, and claim inquiries; dealing with cash needs; and helping their clients' clients who were directly affected.

As the days and weeks passed, we began to reflect on some of the longer-term implications for our country, our way of life, our economy, and our sector of the economy. Somewhere on that list, is the question of the implications for the work of casualty actuaries. We asked Top Ten survey respondents to help identify some of the most important of these implications.

For the work of casualty actuaries, the four implications most frequently cited by the respondents all relate to conditions in the property/casualty underwriting market. The most frequently cited implication was the acceleration of the general hardening of the property/casualty insurance market. In a close heat for second were: the introduction or expansion of terrorism and nuclear exclusions in policy language and in reinsurance terms; the decreased availability of insurance and reinsurance; and the increased cost of reinsurance. Each of these implications changes the economics and dynamics of the markets our employers and clients operate in, and can change the very viability of those markets. Actuaries are directly involved in evaluating these different markets and in evaluating cost implications. Where our employers and clients are buyers (of insurance or reinsurance) rather than sellers, actuaries may be involved in helping devise strategies and pricing implications for our clients' and employers' own products.

The fifth most frequently cited implication is the likely change in business interruption coverage. Historically, relatively few casualty actuaries have been significantly involved in analyzing or pricing this coverage. September 11 has raised the visibility of business interruption coverage, prompting questions about what is or is not covered, to what degree it is covered, and under what situations. We may expect to see some buyers and sellers (and regulators) rethinking their positions on this coverage, and some entrepreneurs introducing creative new products responding to the business need. Actuarial analysis of the expected costs and risk characteristics of the potential exposures would be helpful to all parties.

The implications cited sixth, seventh, ninth, tenth, and eleventh all relate to evaluating "risk": the uncertainties and probabilities surrounding our employers' and clients' business plans. Respondents noted that September 11 requires that we think about risk in a new way; that we recognize and quantify the possibility of new sources of risk; and that we expand our prior thoughts as to a "worst case scenario." Certainly our employers and clients will have a better understanding of the concept of "worst case scenario." Respondents also observed that the events of September 11 illustrate the intertwined nature of risk: one event can affect every insurance coverage; it can affect multiple insureds in multiple locations; it can affect an insurer's operations and investments at the same time the event is affecting policyholders; and it can create a multitude of ripple and shadow effects after the fact. This new awareness and sensitivity will affect the way we factor risk into our work: from calibrating DFA models, to modeling clash covers, and from pricing an exposure that was not previously recognized, to considering the capital requirements of our employers, our clients, and their insurers/reinsurers.

The eighth most frequently cited implication for casualty actuaries related to the level of industry capitalization as well as other implications cited less frequently. Specifically, respondents noted the immediate impact of September 11 on the current financial condition of insurance companies. Companies so affected need to rally their management teams, including actuaries, around rethinking some aspects of their business. Another implication cited by various respondents was the emergence of new capital and new players in the aftermath of September 11. These new players will need some actuarial support to devise their strategies, evaluate their risk positions and capital structures, and underwrite and price their products.

Finally, respondents noted several practical business issues that need to be addressed: defining insurable events, and establishing firm policy terms and language prior to binding coverage.

The array and range of September 11 implications identified in this informal survey makes it clear that casualty actuaries will be affected in significant ways, regardless of the geography, market segment, and job title of their daily work.