Insurance implications and lessons from 9/11

By Ken Kukral

As I sit here on 9/11 remembering the tragedy and listening to TV and radio tributes of the event, my insurance mind awakens.  I look back at this event and my mind races to what lessons have we learned from this event and how did this change our business.

Just looking at the numbers, this was the second worst disaster behind Hurricane Katrina.  According to the Insurance Information Institute the insured losses from 9/11 totaled a whopping $32,500,000,000!  (Yes, 32 billion dollars) This loss didn’t harden the insurance market but did help accelerate the market turn.  The city of New York estimated the economic impact at just under $90,000,000,000 with gross City Product impact at an additional $60,000,000,000 , not including loss of wealth which is estimated at just under $9,000,000,000 and loss of jobs in the area 146,000.  The magnitude of the size of this loss still amazes me.

One comment I read said the insurance world just got “flatter” with the 9/11 loss.  It helped to show how interconnected the world is and how what happens in one state or country can affect many others, both economically and insurance wise.

Some of the implications of 9/11 on the insurance and risk management industry are:

1. Terrorism Insurance – A peril that was once “included” and part of everyday insurance became a separate product with government backed reinsurance.  The sheer size of this loss helped open the eyes of the insurance companies and they soon realized they could no longer assume the amount of risk they might be exposed to.  I am not sure there has ever been a loss paid out yet on the post 9/11 terrorism insurance product but money has been set aside for it

2. Increased awareness of consequential loss – This loss was very far ranging and beyond anyone’s insight and expectation.  Businesses around the World Trade Center were shut down for a significant period of time, even if they had not suffered a direct loss.  The NY Stock exchange was shut down for 4 days.  Subway system was affected.  Airline travel changed forever.  I know of a health club that was near the WTC that went out of business since 40% of their clients died in the WTC collapse.  The affect of this event was far and wide.

3. Realization that current period of restoration may be much longer than expected.  How does 12+ years to rebuild a building sound?  The replacement building (Freedom Tower) will not be open and ready for occupancy until late 2013.  No one could have anticipated the amount of time it would take to get this project planned, engineered and built and I doubt they had the amount of business income (loss of rents) they could have used.

4. The concept of higher debris removal cost was exacerbated – It seams that no calculation can ever be done that would encompass every possible loss scenario.  This helped to show that you can never fully anticipate every possibility and all you can do is make your best educated guess and then maybe add more onto that number.

5. Increased use of event cancellation coverage – I was set to travel to a convention on 9/12 and was not able to do that.  The convention, luckily carrier event cancellation coverage and was paid for the loss.  They ended up rescheduling the convention months later.

6. Recognition of the risk factors for events with large attendance –  Events that involve large crowds of people have had to step up their risk management and security to help prevent a large loss.  Their insurance costs have risen too due to the higher awareness and perceived loss potential.

7. Resurfacing of the age old question of “do I have high enough limits?” – If a single event can cause a huge loss like this one, it brings up the discussion of potential loss exposure and how much of that risk transfer you want to lay off to an insurance carrier.  Risks near large venues and inter-city (target rich environments) may want to consider carrying higher limits of liability

8. Significant expansion of Enterprise Risk Management (ERM) – This was another loss that expanded the possible loss scenarios that could happen and the risk management implications of that loss.  I think there was a belief prior to this loss that “it could never happen to us”.  Some of the areas of ERM involved:

  • Immediacy for the need to an executable disaster plan – Many businesses were caught with “their pants down” after this loss.  They had to scramble to get back in business and a number of businesses failed due to poor planning.
  • Reinforced the need to plan for documenting a loss prior to the loss happening when records may be lost, damaged or take significant time to put together.
  • Date loss implications – Just another example of why you should have an IT disaster plan and be ready to implement it on a moments notice.
  • Clearly defining coverage, terms and conditions at renewal since the owners of the WTC and the broker for the WTC were still hammering out policy provisions from their recent renewal.  Subsequently, risk managers have had to drill down to the details of their insurance program to make sure everything was “buttoned up” prior to a renewal since you can never know when a loss might happen.

I remember reading an article in Risk & Insurance where they gave the risk manager from Verizon (The only company that affected by all 4 plane crashes) the Risk Manager of the year award.  They went through how prepared they were for a loss of this magnitude.  How well their disaster plan went down to the authority of each individual.  Less than 2 hours after the collapse of the towers the person responsible for ordering fiber optic cable put in a huge order and went to the front of the line, with the government putting an even larger order the day after,  was behind them in line.  They had the inventory of all damaged equipment down to the model number and serial number in a database and were able to submit a proof of loss in less than 90 days when the average claim would be in excess of one year.

I don’t think enough is done in the insurance business to work on the expectations of customers after a loss.  Some pre-planning can make ALL of the difference after a loss and will result in much more satisfied customers.  Many customers feel like they are “in it alone” after a loss and many times reach out to public adjustors and attorneys for guidance, resulting in increased loss adjustment expense and delayed payouts.  My hope is that agents become more proficient in risk management and loss mitigation so that they have a much more loyal and satisfied clientele.

On a more human note, one of the most important lessons I learned from 9/11 was in dealing with our staff.  This was a “larger than life” event and we allowed our employees to access the media and learn all they could about this disaster.  We ended up closing early so our staff could spend time with their family and deal with the angst and anxiety that emanated from this catastrophe.  We were lucky to not have anyone we knew be directly affected by the devastation in NYC but had 2 owners “in the air” at the time.  We were relieved to find out they were OK but had to wait a week for them to return when planes were allowed back in the air.  I was appalled when I heard of one insurance agency (who will remain nameless) who would not allow their employees to take personal calls, access any media to find out details of the disaster or even to go home early.  They didn’t want them to be distracted and wanted a full day’s work out of them.  The disaster of 9/11 helped to reinforce what is important in life and to this day I still get teary eyed when hearing God Bless America which reminds me of that dreadful day.

My thoughts and prayers continue for all those affected by 9/11 and hope we never have to experience anything like it again.

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