9-11 Casts A Shadow Over Group Life

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There has been little change in the way life reinsurers are marketing, underwriting and pricing group life reinsurance following the September 11 terrorist attacks.

Even so, significant changes are afoot for primary group life insurers, especially in managing their net retained exposure. How and whether agents, brokers, and customers will be affected is yet to be seen. For now, the business is assessing its strategies in a world of new uncertainties.

Several factors are contributing to the “no-change” aspect of the situation in todays group life reinsurance market. These include continued favorable mortality trends, healthy competition nationwide–and the fact that much of the group life reinsurance market has had relatively low losses from the attacks.

Given all of the reports that have come out concerning the huge losses caused by September 11, you may well be wondering: How can those things be?

The answer is: catastrophe reinsurance.

The companies that bore the brunt of the individual and group life claims stemming from September 11 were the providers of catastrophe coverage that protected the net retentions of the insurance companies. As a result, the group marketplace has seen little change in the excess per life reinsurance arena to date, and almost no impact on the price or availability of group life products.

Group life reinsurers realize, if they exclude terrorism or raise prices now, they will either not be a viable market or they will be uncompetitive. With few September 11 losses, excess life reinsurers cannot go to their clients with price increases based solely on “what could happen next time.”

However, as suggested earlier, there is more to the group life story. In the aftermath of September 11, the catastrophe coverage that shielded group policies back then has diminished. This coverage has also become much more expensive. Prices for accident and health catastrophe coverage have soared, in some instances to 20 times last years costs, and A&H market catastrophe capacity is sharply down, from $1 billion to $150 million.

In addition, no state has approved terrorism exclusions for group life or disability coverage comparable to those implemented for commercial property risks.

As a result, insurers are now seeking new answers, and posing new questions, about their net retained exposures.

Clearly, if there is another major event, and without the catastrophe market as an affordable, available safety net, price increases to the consumer for group life coverage wont be easily avoided.

Therefore, what has changed dramatically in the wake of September 11 is the new parameters insurance companies face in managing their net retained exposure for group coverage.

Catastrophe coverage is more limited, with much higher net retentions per occurrence ($5 million is not uncommon). In addition, nuclear, chemical, and biological terrorism are becoming standard exclusions in catastrophic policies, although pockets of coverage for full terrorism still exist in this market.

Newly important is the rise of census reporting within employers broken down by state, zip code and even street address. This will help reinsurers evaluate and respond to concentration of risk.

A&H market catastrophe capacity didnt just shrink. Most of the $1 billion in catastrophe capacity from 2001 is gone. Its been replaced by new capital, some of it from Bermuda-based property and casualty companies.

Pricing has exploded in a classic case of supply and demand. Pre-September 11, when there was an abundance of capacity, life catastrophe coverage might have cost $45,000 for $90 million excess of $10 million per occurrence. Now, the same coverage might cost $900,000 or more.

As a first step in managing their net retentions, insurance companies will need to take an inventory of their exposures in order to make fully informed decisions on group life reinsurance strategies going forward. After that, they have five basic options to consider–as shown in the chart.

In some ways, its a waiting game. Over time, the catastrophe market likely will soften somewhat, because:

Capital providers will see hefty profit margins on the business written this year and request that more capital be put to work; or

Capital providers, seeing that the capital already put up isnt being fully utilized, will demand that existing capital be put to work.

The former increases capacity, and the latter increases competition, both of which serve to drive down prices.

In the meantime, the group life industry can only be reminded that, after September 11, primary insurers are back in the risk-taking business in a significant way.

is vice president-special risk reinsurance for ING Re, Minneapolis, Minn. He can be reached via e-mail at scott.machut@ing-re.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 13, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.