The darkest hour…

This weekend will mark the 20th anniversary of the 9/11 terrorist attacks on the World Trade Center – a vile, catastrophic event that continues to shape the world we live in today and which at the time extracted a huge human and financial toll on the (re)insurance sector.

Regarding the latter, two of the worst affected were global brokers Marsh McLennan and Aon. Tragically, Marsh McLennan lost 358 team members and consultants on that fateful day while Aon saw 176 members of its workforce lose their lives.

“Our lost colleagues are, above all, your adored children and parents, husbands and wives, sisters and brothers, your cherished relatives and friends,” reads the inscription at the memorial at Marsh McLennan’s New York headquarters.

For both firms, and the wider industry, this weekend’s anniversary will naturally be a time for reflection.

Insurance claims following the event meant the attacks also took a large financial toll on the sector.

According to the Insurance Information Institute, total insured losses from the event were around $47bn, around two-thirds of which were passed to reinsurers.  

At the time this was the costliest event on record for the global (re)insurance sector, with claims spanning multiple classes including property, liability, aviation, accident and health, business interruption and workers’ compensation. But the financial pain was much magnified by the timing of 9/11 – coming, as it did, at the end of an enervating soft reinsurance market which saw carriers under-price and under-reserve.

Even now, it reminds one of the conversation in Hemingway’s The Sun Also Rises. “How did you go bankrupt?” Bill asked. “Two ways,” Mike replied. “Gradually and then suddenly.”

For a number of Lloyd’s syndicates and smaller insurers and reinsurers that had been running on fumes, 9/11 was the final loss (in addition to a number of casualty-focused carriers including Australia’s HIH, the UK’s Independent and the US’ Reliance that also fell over).

The attacks also exposed serious shortcomings in the underwriting process when it was discovered that multiple wordings were used to insure the Silverstein-owned World Trade Center towers and in some cases had not even been issued at time of inception.

The requirement for Lloyd’s to put up 100 percent reinsurance collateral in the US trust funds overseen by the state regulators also put huge pressure on the market’s short-term liquidity. If a temporary extension of the timeframe had not been granted, it would have caused the market huge difficulties and potentially threatened its future existence.

Fast forward 20 years and there has clearly been much progress. The industry is now sufficiently capitalised to withstand a loss on the scale of Covid-19, as well as regular double-digit billion-dollar catastrophe losses.

Lloyd’s may have recently come through another period of weak underwriting but most would say underwriting standards, analysis of aggregates and data is much better now than 20 years ago.

Contracts are now issued on time – even if most business is still placed in an analogue fashion.

The industry’s standing is arguably higher than two decades ago, when politicians and regulators were myopically transfixed by investment bankers – and the illusion of wealth creation through leverage and parcelling risks (a lesson Lloyd’s had already learned with the LMX spiral). 

But last year was also a lesson the industry must learn from. Covid-19 showed that contract certainty is not simply a question of issuing policies – the wording also needs to be clear and easily understandable.

The willingness of too many insurers to immediately default to “not covered” despite wording which implied the opposite shows some insurers still have a defensive, lead-footed instinct out of place in a modern world. The industry coined a phrase for this situation generations ago – “pay, if grey”. It is a shame some have forgotten this – and are paying the price with a damaged reputation now.

But overall, the global P&C industry is in a much stronger position now than 20 years ago and is poised to play a pivotal role in the transformation of the world economy over the next 20 years. For this we can be thankful on what will be a sad weekend for many…