A flood of claims from the World Trade Center attack could drive up the already high cost of workers' compensation insurance in New York state, according to industry experts.
Workers' compensation is a state regulated business. Rates are set based on the claims experience of companies within each state, meaning Western New York companies will feel the market impact of the tragedy hitting fellow New Yorkers.
Thousands of workers from the World Trade Center -- about 50,000 people worked in the twin towers -- and neighboring buildings are expected to receive benefits to treat physical and emotional injuries suffered during the horrific Sept. 11 attack.
"That particular area of the property and casualty market in New York was weak to begin with. You were probably going to see higher (worker's compensation) premiums anyway. You're likely to see even higher premiums now as a result of the World Trade Center catastrophe," said David Lackey, president of Weiss Ratings, an independent organization that rates the financial strength of insurance companies.
The New York Compensation Insurance Rating Board collects claims data from all insurance companies and regulates premiums on an annual basis.
Martin Heagen, vice president and actuary of the Manhattan-based agency, said it is way too early to begin gauging the impact.
"We don't know what the liability is yet. We can't even get a handle on the number of physical injury cases we've got out there yet," Heagen said.
He said the board intends to segregate claims data from Sept. 11 cases, and may exclude it from future rate setting.
"We collect the data, then we analyze it, then we do things to it to eliminate aberrations. We work hard to see that a single event does not unduly effect the net results," Heagen said.
But rate decisions made by the board are reviewed by committees of member insurance companies, and a decision to exclude data and force carriers to absorb the losses may be resisted by the committees.
Tremors from the terrorist blasts rocking New York City and Washington will roll through almost every sector of the insurance industry. Insurance policies typically have "acts of war" exclusions, but most insurance companies immediately said they will not even consider invoking those escape clauses.
Property claims alone could surpass the 1992 damage of Hurricane Andrew, which ranks as the most expensive national disaster at $15.4 billion.
Property claims are not likely to threaten the solvency of any individual
companies, because insurers have large reserves saved for catastrophic losses and reinsurance contracts spread the risk, said Bernard Bourdeau, president of the New York Insurance Association, a state organization for insurance companies.
"From the property end, because of the way reinsurance contracts work, this is going to be a big hit, but it's going to be spread across the globe . . . Certainly some of these companies are going to hurt financially, but I don't think you'll see any of them go out of business," Bourdeau said.
The simplest explanation of reinsurance is risk sharing. A company insuring a $40 million asset might keep $10 million of the risk and sell the other $30 million across three different reinsurance companies.
The reinsurance companies will pay the bulk of the property losses from Sept. 11.
XL Capital, a reinsurer based in Bermuda, estimates its claims in the $600 million to $700 million range. Ace Ltd., another Bermuda based reinsurer, estimated its losses at $400 million.
"A lot of the large insurance companies and the reinsurance companies are going to take a bath on this," said William Lawley Jr., managing partner of Lawley Service in Buffalo. "I think what we're going to see is this will be passed from the reinsurance companies to the insurance companies (in higher premiums) and then on to the consumers."
Because more than 5,000 people are feared dead, this is also a catastrophic life insurance event. The attack hit the center of the world's financial market, where many of the center's occupants were high net-worth individuals.
A number of the deceased were likely covered by multimillion-dollar policies both as personal life insurance and on corporate "key man" policies, Lackey said.
New York Life Insurance Co. estimates its financial exposure at $50 million to $75 million, but the size of the loss pales in comparison to the company's $40 billion of reserves.
Since life insurance is based on human life expectancy, this single event will probably have no impact on life insurance premiums.
"This increase in deaths, while sizable and horrific, is not going to have a material impact on those mortality tables," Lackey.
A large number of automobile insurance claims are also expected for cars parked around ground zero. Lawley Service has already received a number of claims from clients covered through its Westchester County office.
The effect on workers' compensation insurance may have the broadest impact on Buffalo businesses. Worker's compensation is mandatory coverage, any business with employees has to buy the coverage.
Rates are set across hundreds of different job sectors. For example, auto workers cost more to insure than lawyers. But the geographic market is statewide, so lawyers in Buffalo would absorb the same premium increases as lawyers in New York City.
"It's state-rated coverage, the state is the state, whether you are in Manhattan or Brooklyn or Buffalo," Lawley said.
The cost of worker's compensation insurance is already considered one of the more onerous aspects of the state's business climate. Workers compensation insurance in New York is about 30 percent higher than the national average, although the gap has shrunk in recent years, according to the Business Council of New York State.
Joe Annotti, a spokesman for the National Association of Independent Insurers in Washington, D.C., said he does not anticipate any "dramatic" premium increases as a result of recent events.
"Until you go through and add things up, it's hard to make a projection. This is all guesswork right now," Annotti said.
Many insurance agents are not sure what to tell their clients. Until the damaged is sorted out and more hard costs are known, accurately gauging the long term financial impact will be difficult.
"It's really going to vary by company. I don't think there is a blanket answer for all insurance companies on how this event will effect them. This is brand new territory, that's for sure. I've never seen anything like this before in our industry," said Kathy Weinheimer, vice president of industry relations for the Independent Insurance Agents Association of New York.