Changing with the times: Insurers, now aware of their vulnerability when insuring high-profile institutions, are forced to be more selective in the risks they accept. (Property/Casualty).

Publishers may be burning the midnight oil to issue new textbooks with revised chapters on underwriting commercial risks now that the destruction of the World Trade Center has set traditional underwriting on its tail.

Six months ago, any large insurer would have enthusiastically bid on property or workers' compensation coverage for a major accounting or law firm in high-profile, first-class office buildings in major cities. Office-knowledge workers had always been considered low-risk from a workers' comp standpoint, and offices in modern, well-kept buildings were unlikely to generate much property-claim activity.

The new textbooks will view such risks very differently. One of the big lessons for insurers this fall was that high-profile establishments also can be major targets. Chances are, high-rise buildings may be difficult risks for brokers to place as more insurers digest this lesson and may view skyscrapers as too hot to handle.

Another important lesson is that risk needs to be viewed in an aggregate as well as account perspective. Carriers have begun to consider the total value in all lines of the people and property they insure in a single building, a single block and couple of blocks. Using this information, they'll decide what they can comfortably write or renew. Insurers that took a hit--and even those that didn't--now understand that they cannot afford to insure a whole neighborhood of first-class office space and well-kept homes and autos. Those, like Hartford, that prided themselves on the effectiveness of disciplined underwriting by geographic regions to prevent heavy hurricane and tornado losses, now realize that all-lines microgeographic-rather than single-line macrogeographic-underwriting is the prudent way to keep within its risk capacity.

We've come to understand that we can no longer treat man-made catastrophes as flukes. Terrorists prepared long and hard for Sept. 11, perfecting their strategies with attacks on embassies and ships and with the earlier bombing of the World Trade Center. As we plug each vulnerability, they'll look for others, so insurers must be prepared.

As I write this, there is no federal backstop legislation and an extremely limited industry appetite for terrorism risks. Companies offering new products to cover terrorism are choosing their risks carefully, so there's virtually no reinsurance to protect national companies for nuclear, biological and chemical risks. Jan. 1 has come and gone without too much news that businesses were unable to find coverage. But I predict--even with backstop legislation--that the worst business disruption is yet to come.

Hardest hit will be the most vulnerable institutions, such as large airports, bridges and tunnels. Major hospitals, civic centers and large, enclosed shopping malls also will have difficulty meeting their needs from insurers that view these operations unfavorably because they draw large concentrations of people.

Location is another negative. Institutions in major cities--such as New York, Washington, Chicago, Los Angeles, San Francisco, Detroit--will be less attractive. One insurer recently nonrenewed the workers' comp coverage for a good account it had written for more than 60 years because the account had too high a concentration of people in a building in a particularly vulnerable city, and the insurer could not comfortably afford the potential loss.

In trying to predict and thus underwrite risks, insurers need to understand the mindset of a terrorist plotting an action--a skill not traditionally taught in insurance schools. After the World Trade Center and the Pentagon, what might terrorists target next to strike at the country's psyche? A major amusement park? A casino? A fast-food chain? A large theater or concert hall? A well-known factory? The list goes on and on, and so does the difficulty in insuring them.

Terrorism capacity problems do not affect only large institutions. Smaller businesses, particularly those with highly paid people, can quickly aggregate to large potential losses when in or near targeted buildings.

As insurers hit capacity ceilings, there will be growing displacement, and the risks that are written will see increased costs. Prior to Sept. 11, prices for commercial insurance were going up rapidly as the hardened market ended a lengthy cycle of underpricing. Tightened market forces and rising loss costs associated with a recession will drive property and workers' comp prices even higher.

Insurers are in the business of writing risks, not rejecting them, so this is a complex dilemma. We'll see a flight to quality as the industry works on solutions to this dilemma and the strongest in the business will emerge even stronger.

Judith A. Blades, a Best's Review columnist, is senior executive vice president, property/casualty, at The Hartford Financial Services Group, Hartford, Conn.