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Insuring Terror

The business gambles in the U.S. insurance industry in the aftermath of the September 11th attacks.

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  • PAUL SOLMAN:

    The biggest insurance event ever, with claims in the tens of billions of dollars, and, says the industry, with the real risk of future attacks, terrorism has created an insurance crisis. But has it? Well, for that question, you need to know one thing about insurance risk; that perception is as important as reality.

    To begin, then, a test of your risk perceptions. You might want to jot down your answers. First, how many of us Americans die in plane crashes on average each year? Two, how many die in car accidents? Just put down a guess. Three: Are there more homicides or suicides in America? Are there more deaths by fire or drowning? Answers to come.

    But the first point is that while you are guessing, insurers like the Hartford here, one of America's oldest companies, know the numbers. Because their main job is calculating risks and then spreading them over as many people as possible, getting lots of us to pay in to cover the few of us who statistically will have to take out.

  • RAHMANI AYER, CEO, The Hartford:

    When you buy automobile insurance, not everybody has a claim. But several people who don't have claims pay for the few who do.

  • PAUL SOLMAN:

    Rahmani Ayer is CEO of the Hartford, which was founded in 1810 to insure customers against the terror of an earlier age — fire. And indeed, the company made its name by figuring the odds well enough so it had money to pay out when historic catastrophes occurred: The great New York fire of 1835, the great Chicago fire of 1871, in 1906, the San Francisco Earthquake. And insurance firms have relied on reassuring metaphors ever since. Security…

  • COMMERCIAL:

    You're in good hands about Allstate .

  • PAUL SOLMAN:

    Trust…

  • COMMERCIAL SPOKESMAN:

    Handle with care. That's what this familiar emblem says.

  • PAUL SOLMAN:

    — and in The Hartford's case, strength..

  • COMMERCIAL SPOKESMAN:

    When you need us most, we're at our best.

  • PAUL SOLMAN:

    — in the form of the poetic stag or hart, whose fording of the river gave the city of Hartford its name. But if the ads can wax poetic, the essence of the business is pretty prosaic. As The Hartford's most lyrical executive, the poet Wallace Stevens– this was his office– might have put it, there may be 13 ways of looking at a blackbird, but only one of looking at insurance. You figure the odds of calamity, then charge enough to be able to pay off when it happens, plus have money left over to build the business, pay the workers, reward the shareholders, which brings us to the so-called insurance crisis, post 9/11. The industry is now unable, it claims, to accurately make the odds against terrorism. Thus, writing terrorism insurance is too risky.

  • RAHMANI AYER:

    When I look at hurricanes, insuring hurricanes in Florida or insuring earthquakes in California, we look at over 200 years of data and we say, "okay, we can guess that the frequency or recurrent patterns of this type of event is over this many years; therefore, our expectation is this many billion dollars."

  • PAUL SOLMAN:

    Once you know the odds, there are still dangers, of course. The odds of an earthquake in the Pacific Northwest, say, may be knowable and remote, but if you've insured too many homes, those red dots, in Seattle, you could wind up sleepless, waiting for the big one.

  • BUZZ BALDWIN:

    The closer together they are, they indicate there's a greater density, and the concern is that they are located in an area where there have been earthquakes in the past.

  • PAUL SOLMAN:

    But Buzz Baldwin, director of catastrophe management for The Hartford, says there are things you can do.

  • BUZZ BALDWIN:

    So you can look at how much the existing business would cause in terms of a loss, and then it's possible to look to write new business in areas away from the existing clusters that you have. We can also look to increase deductibles, allowing the policyholder, the consumer, to assume more of the risk of that hazard.

  • PAUL SOLMAN:

    Or The Hartford could buy insurance on its policies from big firms that deal only with the industry, known as reinsurance companies.

  • RAHMANI AYER:

    These are insurers insurance companies buy insurance from, and that helps us spread our risk or pool our risk.

  • PAUL SOLMAN:

    The problem post 9/11, Ayer insists, is that the Hartford is still expected as before to write umbrella policies that cover all catastrophes for a business. But its reinsurers say they will no longer cover terrorism.

  • RAHMANI AYER:

    Effective 1-1-02, we're not going to have reinsurance for terrorism, so insurance companies as such are going to have to absorb this peril entirely on their own, which is very difficult to do.

  • PAUL SOLMAN:

    And if there's no reinsurance, then the inability to make the odds can prevent a company from insuring at all. The Hartford's Jeffrey Olmstead insures small businesses with comprehensive policies, which covers almost any form of catastrophe. Now he says he's afraid to.

  • JEFFREY OLMSTEAD:

    After September 11, we have to consider the possibility that your entire business could be destroyed — all the property damaged, all the workers killed or injured– that presents a much larger catastrophic loss potential for us as the insurer than we've ever considered before.

  • PAUL SOLMAN:

    So, what's happened to the commercial insurance business since September 11? We asked Kathy Nickerson, who buys insurance for clients in Boston.

  • KATHY NICKERSON:

    It's escalated dramatically as far as coverages being taken away, not being offered, deductibles being increased dramatically, and the costs are just escalated exorbitantly.

  • PAUL SOLMAN:

    In fact, costs– that is, premiums– have doubled, even tripled since September 11. And that's just for normal insurance. Terrorism may be off the table entirely. That, ostensibly, is why insurance executives have been asking Congress for a government backstop– federal terrorism insurance to transfer the risk to taxpayers. Dean O'Hare, chairman and CEO of Chubb.

  • DEAN O’HARE:

    So, we do need an insurer of last resort. I have no desire to have the government in my business, but I think as a nation we need to continue to provide terrorist coverage in order to make this economy work.

  • PAUL SOLMAN:

    To insurers, terrorism looks like war, which The Hartford at least hasn't covered since the one between the states. The walls here feature policies on both Abraham Lincoln's house and Robert E. Lee's — because in terrorism, as in war, the risks are unimaginable.

  • RAHMANI AYER:

    Biological terrorism is one that is…that is very worrisome. A major nuclear event is very worrisome because we have no idea how widespread this would be.

  • PAUL SOLMAN:

    Given so many uncertainties, then, the so- called insurance crisis would appear to be real. But how does it square with the fact that in the wake of 9/11, at least ten new insurance companies have been announced, backed by tens of billions of dollars in investment capital — or that the stock prices of existing insurance companies, which plummeted after 9/11, are now in general higher than before the attacks, meaning that investors must think insurance companies will now become more profitable. Jim Stone is a former regulator who's run his own insurance firm since 1983.

  • JIM STONE, Plymouth Rock Insurance Co.:

    The companies that lost the most money on September 11 are the same companies whose stocks went up rather than down as a consequence. The public obviously thinks that prices are rising in a way that more than makes up for the one time event.

  • PAUL SOLMAN:

    In other words, claims could rise, but– and here's perhaps the key point– premiums could rise even more. Insurance rates were driven down by competition among companies in the '90s, says consumer advocate Bob Hunter.

    BOB HUNTER, Consumer Federation of America: And they've been looking for an opportunity to jump their prices and this was the perfect chance. So they became very opportunistic and jumped prices even in lines that have nothing to do with the terrorism. You know, home and auto, and things like that are seeing price increases.

  • PAUL SOLMAN:

    The point is, post 9/11, people are willing to pay.

  • SPOKESMAN:

    We have some blankets, extra bottled water, some emergency roadside flairs.

  • PAUL SOLMAN:

    Like P.R. Executive Rodney Ferguson of Washington, D.C., who'll protect his family come what may-

  • RODNEY FERGUSON:

    I went out and purchased an additional $200,000 worth of life insurance. After September 11, it was clear that now was the time to do that.

  • PAUL SOLMAN:

    According to the American Council of Life Insurers, applications for policies have risen 40 percent since the terrorist attacks.

  • RODNEY FERGUSON:

    A physician's aide came to my office and he said he was working seven days a week, ten hours a day and would be doing so for the next several months.

  • PAUL SOLMAN:

    The more people like Ferguson think they need insurance, of course, the more they'll buy and pay, which is good for insurers who even under normal circumstances figure the odds better than we emotional consumers– as experimental psychologist Nick Epley helped demonstrate.

  • NICK EPLEY:

    You have any idea how many people die each year in plane accidents in the United States, can you give us some estimate, how many do you think?

  • MAN ON STREET:

    In the United States?

  • NICK EPLEY:

    On average, each year.

  • MAN ON STREET:

    300.

  • MAN ON STREET:

    Under a thousand.

  • PAUL SOLMAN:

    Under a thousand.

  • MAN ON STREET:

    Five grand. Maybe.

  • NICK EPLEY:

    Five Thousand.

  • PAUL SOLMAN:

    Actually, it's about 100 a year. Next question.

  • NICK EPLEY:

    How many people in the United States do you think die on average in vehicular deaths?

  • MAN ON STREET:

    Ten grand.

  • NICK EPLEY:

    Ten thousand.

  • WOMAN:

    15,000.

  • MAN IN CAR:

    I don't know exactly.

  • PAUL SOLMAN:

    In fact, some 40,000 Americans die in autos every year.

  • PAUL SOLMAN:

    More people die in America of drownings or fires?

  • WOMAN ON STREET:

    Fires.

  • MAN ON STREET:

    Drownings.

  • MAN ON STREET:

    You hear more about fire, I guess.

  • PAUL SOLMAN:

    But the data show that more Americans drown. What about suicide or homicide?

  • MAN ON STREET:

    Probably homicide.

  • PAUL SOLMAN:

    Suicides outnumber homicides three to two. No surprise, however, that even in Harvard Square, Cambridge, most people got the numbers wrong– and presumably misinsure themselves accordingly– since plane crashes, murders, fires are so widely reported. And media coverage heavily influences our assessment of risk. Now think 9/11.

  • PERSON IN CROWD:

    Oh, my God.

  • PAUL SOLMAN:

    The more you see a catastrophe, research shows, the more likely you are to think it will happen again. Therefore, the greater the apparent need for insurance. Moreover, says Nick Epley…

  • NICK EPLEY:

    People assess their risk by thinking about how easy it is to imagine something happening. So the more vivid, the easier it is to imagine some event happening, the more specified some risk is, often the more likely it seems to them.

  • PAUL SOLMAN:

    Such misassessment of risk, says Epley, has real costs to society. With so many now so afraid to fly that they're taking to the road, terrorism may wind up killing even more people in cars than in the September 11 attacks, since statistically you're 37 times more likely to die in an auto crash than in a plane per mile traveled.

  • NICK EPLEY:

    And in fact you could make I think some compelling arguments for why terrorist attacks would be less likely now than they were before September 11 just because of the increased security, even though people's fears have gone up, which would indeed produce this paradoxical effect that insurance companies are less likely to have these kinds of catastrophic losses now that September 11 has come around than they were before, even though people are going to be buying dramatically more insurance than they were before September 11.

  • PAUL SOLMAN:

    If people buy more and pay more, insurers should be sitting pretty, and indeed you could argue that they are in almost every sector of the industry these days, from life insurance to property and casualty. Is it fair to say that insurance companies basically have property owners over a barrel at this moment?

  • KATHY NICKERSON:

    Yeah. I guess they do, you have no choice, you need to buy insurance.

  • PAUL SOLMAN:

    No choice, until the media coverage and fear subside, and insurance firms again begin competing on price. That doesn't mean government terrorism protection isn't a good idea in this new environment, just that the insurance crisis may not be that much of a crisis at all.

  • GWEN IFILL:

    For its part, Congress did not complete action on terrorism insurance legislation before adjourning last week. Leaders said it may be taken up again next year.

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