9/11 and the Insurance Industry: Five Years Later

Just as the terrorist attacks of September 11, 2001, marked a new reality for national and domestic security institutions, government agencies worldwide, the aviation industry and others, they also ushered in a new day for the insurance industry. The events of that day have prompted insurers to introduce terrorism insurance as a necessity, assess underwriting risk more accurately with the use of catastrophe (CAT) modeling, enhance efforts in business continuity and document management and to collaborate with the federal government on 14 major pieces of legislation, including the Terrorist Risk Insurance Act of 2002.

"It was a momentous event that effected so many lines of insurance," says Dr. James Valverde, vice president of economics and risk management at the Insurance Information Institute (III, New York). "But what September 11 really showed us is how to manage and finance extreme events ... by man or by nature."

The total to cost of the September 11 attacks is estimated at $200 billion in losses, according to the Milken Institute (Santa Monica, Calif.), while III estimates insurance claim payments arising from that event are $35.6 billion including property, life and liability insurance claims costs. Since, at the time, terrorism wasn't perceived as a major risk, terrorism coverage was included in most policies, according to Valverde. "One of the most important lessons for the industry to draw from September 11 was the consequence that terrorism was not excluded in most policies being written at the time," say Valverde.

As a result, insurers were not prepared for substantial losses from terrorism. The damage and loss of reserves instigated a renewed awareness of the importance of technology to assess muli-peril risks, including catastrophe modeling for reinsurance, according to Larry Danielson, principal consultant at Deloitte (New York). "The events of that day forced carriers to look across all product lines at multi-risk large loss and how reinsurance coverage stands," says Danielson. This prompted insurers to introduce changes, "into the capabilities of CAT models," he says.

"CAT modelers had a whole new area of focus that they were never involved in before," says Karen Pauli, senior analyst for TowerGroup (Needham, Mass.).

To stabilize the cost of terrorism insurance for the public to purchase, the federal government took on some of the insurance industry's risk with The Terrorism Risk Insurance Act (TRIA) of 2002. The act obligated P&C insurers to make terrorism risk available and affordable. Last year, Congress extended TRIA to 2007. "The industry feels very strongly that some subsequent partnership must exist and the immediate aftermath of the risk of terrorism seems very real to people in the industry. Any situation where such an event is deemed possible calls for TRIA's continued existence," says III's Valverde.

Preparing for future catastrophes also is essential to every insurer's operations, and this reality has changed the way the insurers utilize technology and make IT-related decisions. Craig Lowenthal, vice president and CIO of New York-based Integro Insurance Brokers ($300 million in private placement), who literally lived through September 11, 2001, notes that the lessons of that day have influenced his subsequent technology strategy and investment decisions.

"One of the things we did learn is, where there is human intervention, it is error prone," says Lowenthal. On September 11, 2001, Lowenthal was CIO of Hartford Financial Products (New York) and was in 7 World Trade Center, at his desk, when the planes hit. "We were on the 19th floor and we had a clear view of the north side of the tower. ... I was one of the last ones from our company out of the building, and fortunately we all got out safely ... and so did our tapes."

Hartford Financial Products was using backup tapes at that time and the tapes were not sent offsite Friday evening as planned. However, one of the IT staff grabbed the tapes on his way out of the building, according to Lowenthal. " Because of this, at Integro we do not use back up tapes at all. We minimize human error, avoid losing sensitive tapes and have quicker access to data," he says.

Integro uses highly redundant network attached storage to back up all information via a LAN and WAN. However, according to SunGard Availability Services (Wayne, Pa.), tapes are still the number-one method of backup. "There is not a company out there that is not backing up on tape. Having data backed up is just step one of 100 steps insurers have to take. Business continuity is not as easy as inserting a tape, it is about planning and having many backups," says Dave Palermo, vice president of marketing for SunGard.

Since most of Hartford Financial Products' documents were paper-based and were destroyed by the attacks, Lowenthal also learned on that day how essential document imaging is and has employed it at Integro. "We had to rebuild our paper files by going to clients and partners and searching our own e-mails," he says.

Integro has also implemented IP telephony, which has the ability to reroute all phones to a disaster recovery environment and allow employees to work anywhere. Mobile technology also is now a necessity for the industry to deal with catastrophes, allowing employees to conduct business and communicate normally. However, it is still an area that needs to be explored, according to TowerGroup's Pauli. "The carriers aren't where they need to be with mobile technology if there were a large geographical area impacted by a catastrophe. Insurers need to be able to access satellite communications and do loss adjusting with mobile technology," she says.

Ultimately, the key lesson may be that carriers always need to be anticipating the next risk. "I think we are never really prepared. You will never know all the implications, ambiguities and the actual capabilities you need to deal with a catastrophe," says Deloitte's Danielson.