Litigation Concerns Emerge.

Proposals to expedite claims disputes arising from the Sept. 11 terrorist attacks are gaining ground.

Liability and litigation are moving to the front of insurers' long list of concerns in the wake of the Sept. 11 terrorist attacks that destroyed the World Trade Center and four airliners and damaged the Pentagon.

As some of the top insurance executives in the United States met with President Bush and testified before Congress on the state of the industry in late September, an effort to set up a federal court to consolidate and expedite claims disputes related to the catastrophe was gaining ground.

Ken Feinberg, principal of Ken Feinberg Group in Washington, D.C., and an expert on mass-injury litigation, has drafted a proposal to make the United States District Court for the Southern District of New York in Manhattan the official court for all claims disputes arising from the attacks.

Feinberg, a former aide to Sen. Edward Kennedy, D-Mass., said that under his proposal, the Southern District court would have exclusive jurisdiction to coordinate and resolve all claims. "The court would have authority to parcel out among fellow judges in New York, or Brooklyn, other parts of the city, aspects of those disputes," he said. "The single judge would coordinate it."

The airline bailout bill that already has passed gives exclusive jurisdiction to the Southern District court for victims' claims against the airlines arising out of the disaster, said Feinberg. "It doesn't deal with other claims--property damage, business interruption, individual lost profits, health insurance denial, stuff like that," he said. "This proposal of mine would channel into one court all of those claims, as well as all of the assets and insurance of any claimant.

"The insurers or anyone else could deny any coverage or any responsibility for those claims," he added. "That is fine. They're entitled to do that. That would also be resolved in the Southern District."

The reasoning for having a single federal court handle all claims disputes is that it would keep the litigation from getting out of control, said Feinberg. "It would prevent a race to the courthouse all over the United States...claiming damage, business interruption, emotional distress, who knows what," he said. Once "everybody gets a lawyer, and everyone starts with their own private, local lawsuit, there's no real way that can all be coordinated and done efficiently. This is designed to promote efficiency and equity," Feinberg said.

Biggest Wild Card

There is fertile ground for claims disputes related to the attacks. Many industry analysts see liability as the biggest wild card in any assessment of insured loss. Tillinghast-Towers Perrin gives a range of $5 billion to $20 billion for liability-related losses. The low end of that range, Tillinghast said in a report, represents a scenario in which plaintiffs and defendants come to reasonable agreements on settlements. The high end assumes that "a broad set of actions is initiated, involving many plaintiffs and many defendants."

Stephen Lowe, managing principal for products and services development at Tillinghast, said having a single federal court handle claims disputes would benefit both insurers and claimants. "The intent of the legislation passed related to the airline industry was to expedite the settlement of these claims, rather than have them work their way through the courts," he said.

Asbestos and environmental claims litigation offers good lessons for how not to handle claims disputes, said Lowe. "Some of those claimants had to wait a long time to get their money," he said. "It took years in many cases for the courts to finalize a settlement."

Feinberg said Sen. Charles Schumer, D-N.Y., is interested in introducing the legislation that would make the Southern District court the facilitator for all claims disputes. "It's on a fast track, so if it gets done, it will probably get done within the next 30 days," he said.

Citing a Precedent

There is a precedent for granting such power to a single federal court, said Feinberg. The Price-Anderson Act of 1957 is a pre-emptive law that allows the consolidation of claims in a single court in the event of a catastrophe involving nuclear power plants. "If these terrorists had crashed a plane into a power plant, instead of the World Trade Center or Pentagon, this would automatically go to a single judge at the scene of the crime," said Feinberg.

Bradley J. Mortensen, a partner with the Philadelphia law firm Christie Pabarue Mortensen and Young and a former attorney with the New York State Department of Law, wasn't as enthusiastic about appointing a federal court as a dispute clearinghouse.

"I think the New York courts are fully capable of handling the issues," he said. "They are probably the most sophisticated insurance and reinsurance courts in the country. They'll be able to apply the proper law."

Mortensen said that since insurance law is a state-level affair, disputes should be addressed on that level. "To ask a federal tribunal to handle what is primarily a state-interpreted law is probably not in the best interests of anyone," he said.

The idea of giving a federal court the responsibility for handling all claims disputes arising from the attacks was first raised by Maurice R. Greenberg, chairman and chief executive officer of American International Group Inc.

Morgan Stanley equity analyst Alice Schroeder wrote in a Sept. 18 research note that Greenberg told her he would like to see a federal tribunal in New York handle the liability claims likely to arise, to keep disputes over such claims out of state courts, where large jury awards would be likely.

"Mr. Greenberg is hoping to get the government interested not in some sort of bailout scenario, but in setting up a tribunal or forum with federal judicial oversight aimed for settling claims through arbitration, without involving juries," Schroeder wrote in the research note.

Schroeder said in her report that the state courts "tend to be much more generous in awarding settlements."

The head of the Association of Trial Lawyers of America has called for a moratorium on civil lawsuits related to the events of Sept. 11. Leo V. Boyle, president of ATLA, has asked that the association's nearly 60,000 worldwide members refrain from filing lawsuits until more information is available concerning losses. But a spokesman for the Washington-based association said it was uncertain how many members would heed the moratorium.

WTC Disaster Claims Filed

As of 10/9/01


Commercial            7,899
Personal              5,604
Total                13,503

Claims Value  $4.04 billion

Source: N.Y. State Insurance Department

Insurers Run Low-Key Ads After Attacks

From simple declarations of condolences to practical toll-free phone numbers, insurers have been reaching out to policyholders through special advertising since the attacks. This kinder and gentler advertising is important, because it reinforces the company's brand, one marketing expert said, noting that how the public perceives a company's behavior now and in the coming months could affect its future business.

Prudential Financial ran a full-page ad in The New York Times the Sunday after the attack, quoting a stanza from "God Bless America," said Robert DeFillippo, a spokesman for Prudential. The advertisement, which didn't include the company's logo, ran in place of one that would have touted Prudential's financial products. The company's name appeared in small print at the bottom of the revised ad, which is required by law, DeFillippo said.

"We wanted to express our sympathy--and frankly, our deep pain--as a corporate citizen without pandering," DeFillippo said. The company has followed those ads with very plain, practical ads with toll-free claims numbers in print and in radio. "The most important thing we could do is make sure our policyholders could get to us and make sure their claims are paid in an expedient way. It was also important for us as a corporate citizen to say something."

On Sunday, Sept. 23, Prudential ran a full-page advertisement in several large daily newspapers with just a picture of its "rock" logo and the message: "125 years of serving our clients when they need us most." In the New York and Washington metro areas, the ad included a small box with contact and claims information.

"We're talking to existing customers more than potential customers. We want them to know when you need us most, we will be there," said Michael Hines, senior vice president of global marketing and communications for Prudential.

The company has a history of advertising during difficult national times, including the Great Depression, World War I and World War II. "We're really walking a line here," Hines said. "It's back to business as usual, but it isn't business as usual. It's almost inappropriate to go out there and try to sell hard."

The public expects insurers to respond with this type of advertising after catastrophes, said Clarke Caywood, professor of integrated marketing and communications at Northwestern University in Illinois.

"Insurers have done this before, after Hurricane Andrew, for instance," Caywood said. "Although we've never seen a crisis of this magnitude--emotionally or physically--companies will often change their strategy for advertising immediately after a crisis in order to communicate more about their brand than simply 'buy more.'"

Companies choose to run these plain, narrative advertisements instead of traditional graphics-heavy ads "to seem human and sincere," Caywood said. He noted that many companies have put letters from chief executive officers or messages expressing sympathy on their Web sites.

This advertising tells consumers "to have confidence in us... Subtly, they're also saying, 'We're financially solvent,'" Caywood said.

Consumers will judge companies by whether they acted appropriately in the days and months after the catastrophe, Caywood said. A company's brand could be enhanced or damaged by how the public perceives that.

Meg Green

Marsh Responds to Capacity Shortage With New Insurer

A Marsh & McLennan Cos. subsidiary will form a new insurance and reinsurance unit to respond to the industry's capacity shortage caused by the Sept. 11 terrorist attacks.

MMC Capital Inc., Marsh's private equity subsidiary, will form Axis Specialty Ltd., which will be based in Bermuda and is expected to be capitalized with $1 billion, MMC said in a statement. Trident II, a fund managed by MMC, will be the lead investor.

Axis is expected to begin underwriting in the fourth quarter of 2001.

Teryce James, a spokeswoman with MMC Capital, said Axis would initially write both insurance and reinsurance coverage for all-peril property, aviation, war, political risk and other coverages to be determined by management. "This will be a specialty lines insurer and reinsurer that will provide capacity in areas identified as having capacity shortages," she said.

James added that Axis management currently doesn't have geographic limits in mind.

Recently, American International Group Inc. said it and its companies would lead the placing of aviation war risk and hijacking liability coverage, offering $150 million in excess of $50 million, and as much as $850 million in excess of $150 million, for a maximum of $1 billion per airline, enabling airlines to get the $1 billion in coverage required by many airline regulators.

Axis Specialty will be led by John Charman, chief executive officer, and Robert Newhouse Jr., chairman. Charman is the former president of Ace International and former CEO of Tarquin Ltd. Newhouse was formerly chairman of Mid Ocean Ltd., and before that, he was vice chairman of MMC.

Charles A. Davis, vice chairman of Marsh & McLennan and CEO of MMC Capital, said the formation of Axis is part of a tradition at MMC of providing coverage in areas where capacity is tight. "Trident II was established by MMC to address supply and demand imbalances in the insurance and reinsurance markets," he said in a statement.

MMC played a big role in the creation of Ace Ltd. in 1985 and XL Capital Ltd. in 1986 to provide excess liability and directors and officers liability cover-ages to corporations at times when supply was tight, Davis said. In 1992, MMC also played a role in the formation of Mid Ocean Ltd. as a response to a shortage of property/casualty reinsurance.

Born After the Storm

Here are some of the catastrophe reinsurers launched after Hurricane
Andrew struck in August of 1992.

Company              Launch             Status

PartnerRe Ltd.     Aug. '93  Still independent
RenaissanceRe      June '93  Still independent
Holdings Ltd.
Global Capital     Oct. '93            Sold to
Reinsurance Ltd.             XL Capital in '97
Mid Ocean          Nov. '92            Sold to
Reinsurance Co.                      XL in '98
Tempest            June '93            Sold to
Reinsurance Co.                Ace Ltd. in '96
LaSalle Re Ltd.   Sept. '93        Merged with
                                Trenwick Group
                                  Ltd. in 2000

Insurers Add Up Estimated Losses From Attacks

Insured loss estimates continued to mount in October, as insurers began to look at the impact of the events on their third-quarter earnings.

The following are among the insurers that have reported estimated losses:

* Munich Reinsurance Co., pretax loss of 2.1 billion euro (about $1.9 billion). The company cited the number of buildings damaged or destroyed in addition to the twin towers-and the resulting escalation of expected business-interruption claims. Munich Re said the loss estimate, at 11.5% of its reinsurance premiums in 2000, would put the event very close to its largest proportional loss ever-the 1906 San Francisco earthquake.

* Swiss Reinsurance Co., 2 billion Swiss francs (about $1.2 billion). The company was among the leading reinsurers on the World Trade Center's property and business-interruption coverage, with net reinsurance exposure of about 750 million francs.

* Berkshire Hathaway Inc. (NYSE:BRK.A), $2.2 billion.

* XL Capital Ltd. (NYSE: XL), about $1.8 billion, or a net of $700 million after reinsurance recoveries.

* Ace Ltd. (NYSE:ACE), gross exposure of $1.74 billion, $550 million after taxes in third quarter.

* Allianz AG Holding, 1 billion euro (about $908 million), citing business interruption, aviation and property coverage as the principal sources of claims.

* American International Group (NYSE:AIG), $800 million, before taxes.

* Zurich Financial Services Group, $700 million to $900 million in pretax losses, net of reinsurance and inclusive of reinstatement premiums.

* St. Paul Cos. (NYSE:SPC), $700 million before taxes.

* Axa, about $550 million, including some $400 million on reinsurance business. Axa's own gross reinsurance exposure, before retrocession, is about $1 billion.

* Axa Art Insurance Corp., $20 million from art work that it insured in the World Trade Center.

* Hartford Financial Services Group Inc. (NYSE: HIG), $450 million after taxes.

* Employers Reinsurance Corp., $400 million after taxes.

* PartnerRe Ltd. (NYSE:PRE), $375 million after taxes.

* Liberty Mutual Group, $200 million to $300 million after taxes.

* FM Global, $165 million after taxes.

* Alleghany Corp. (NYSE:Y), about $112 million.

* Royal & Sun Alliance Insurance Group plc, about [pound]200 million ($290 million), net of reinsurnnce.

* Trenwick Group Ltd. (NYSE:TWK), $100 million, net of reinsurance recoveries.

* Prudential Insurance Company of America, $75 million to $125 million after taxes, taking into consideration reinsurance coverage.

* Kemper Insurance Cos., $60 million to $80 million, net of reinsurance arrangements.

* Markel Corp. (NYSE:MKL), pretax losses after reinsurance of $75 million.

* London Insurance Group Inc., net financial losses to its reinsurance subsidiary of C$73 million (about $47 million) in its shareholder account, and about C$9 million in its participating policyholder account. The financial impact was related to the reinsurance business of London Reinsurance Group Inc,, a subsidiary of London Life Insurance Co.

* RenaissanceRe Holdings Ltd. (NYSE:RNR), a net loss of about $50 million.

* ING Group (NYSE:ING), 50 million euro (about $45 million) on its individual and group life insurance, as well as life reinsurance.

* PXRE Group Ltd. (NYSE:PXT), $30 million to $35 million

* Safeco (NASDAQ: SAFC), $25 million in its primary insurance lines, net of reinsurance. In addition, the company estimated it would post an additional loss of between $5 million and $10 million through its l Lloyd's operations in reinsurance exposure.

* Cigna Corp. (NYSE: CI), $25 million after taxes;

* Protective Insurance Co., pretax losses of $20. million.

* Allmerica Financial Corp. (NYSE:AFC), $17 million in losses.

* Aetna Inc. (NYSE:AET), $10 million to $15 million.

* Principal Financial Group, $9 million to $12 million.

* Erie Indemnity Co. (NASDAQ: ERIE), $5.5 million to $6.7 million before taxes.

* Annuity & Life Re (Holdings) Ltd. (NYSE:ANR), $5 million to $7 million.

* StanCorp Financial Group Inc. (NYSE:SFG), pretax losses under $6 million.

* SCPIE Holdings Inc. (NYSE:SKP), net exposure won't exceed $5 million before taxes.

* Max Re Capital Ltd. (NASDAQ: MXRE), estimates its gross losses from its reinsurance contracts at $51 million from the attacks.

* Navigators Group Inc. (NASDAQ:NAVG) about $5 million. The loss comes primarily from business underwritten at the company's Lloyd's Syndicate 1221.

* Harleysville Group Inc. (NASDAQ:HGIC), no more than $3.6 million

* Highlands Insurance Group Inc. (NYSE: HIC), less than $2 million.

Life Claims More Defined

Some equity analysts say the life insurance industry will feel only moderate effects from the terrorist attacks, bolstered by a strong reserve position.

The poor performance of the stock market for the first two-thirds of the year will be as much a factor as the impact of the attacks, said Vanessa Wilson, a life analyst for Deutsche Banc Alex Brown.

The life industry has more than $183 billion of statutory capital in reserves, with an expected $3 billion in claims for the industry as a result of the attacks, said a spokesman for Goldman Sachs.

Tillinghast Towers-Perrin has placed the estimated losses for the life, accidental death and disability business at $4.5 billion to $6 billion.

Nigel Daily, a life insurance equity analyst with Morgan Stanley Dean Witter & Co., said estimates for the third quarter are for an additional drop of about 29% in profits after the attacks and a continued drop in the stock market.

Daily was predicting 3% third-quarter growth in profits for the life industry before the attacks. But between the continued drop in the stock market and the losses from claims, companies are estimated to have a 26% drop in earnings per share for the quarter, his report said. Dally's report notes projected reductions in earnings per share of 8% for all of 2001, with an additional loss of 3% in 2002 attributable to the attacks.

The advantage for life markets is that losses from the attacks are more easily defined and still limited for disability products, Dally said in his report.

In addition, a wait-and-see attitude by customers will carry over into the products they will purchase, Wilson said, noting that customers won't be looking for long-term investment opportunities, such as variable annuities.

A reduction of 25% in the annuity market in general can be expected, Dally's report said. A greater emphasis on traditional products with fixed returns will be seen, the report said.

John Hillman

Bermuda Insurers Expect Transformation

Bermuda's insurers and reinsurers are preparing or a radically transformed marketplace in the wake of the Sept. 11 terrorist attacks, with buyers choosing security over price, and insurers selecting their risks carefully and making certain they collect a premium for every peril.

Several companies at the Bermuda Angle 10th Annual Conference in South Hampton in early October, portrayed a seller's market by almost every measure: shrinking capacity, soaring rates, lower limits and tighter terms of coverage. Dominic Frederico, Ace Ltd.'s president and chief operating officer, predicted rate increases of 50% to 100% across wide swaths of the commercial liability, property and aviation markets, in the United States and at Lloyd's.

A recurring theme of the conference was a backlash against loosely written reinsurance coverage that covered a wide range of risks. "We need to define the risk, we need to contain it, and we need to get paid for it," said Scott Moore, president and chief executive officer of PartnerRe U.S.

Henry C.V. Keeling, president and CEO of XL Re Ltd., denounced the "holistic view" or "whole account" approach that had crept into reinsurance contracts, with varied coverages packaged together. XL Re will move to "unbundle the covers" and sell each for more than they would have cost in a package.

Bill Riker, chief operating officer of RenaissanceRe Holdings Ltd., said his company avoided "gratuitous exposure"--risks that many reinsurers effectively took on for free under "worldwide general coverage" policies. He said the lack of such exposure helped to limit RenaissanceRe's gross losses from the tragedy to about $150 million--which dropped to $50 million after retrocession.

Riker said the attacks would fundamentally change the perception of correlations between various lines of business, many of which were exposed for the first time by the World Trade Center disaster. Companies will have to increase their capital allocations and rethink their underwriting to limit those correlations, he said.

Capacity Contracts

This renewed focus on underwriting will come against the backdrop of a slurp contraction in capacity and a simultaneous spike in demand, setting the stage for steep rate increases. "It is very important that the industry doesn't go into gouge mode," said Patrick Thiele, PartnerRe Ltd.'s president and CEO.

Thiele and others said the tilt toward deregulation in the United States may reverse as rates skyrocket. Non-U.S. reinsurers, beyond the reach of rate regulation, will be "the home of last resort of volatility," Thiele said.

Bermuda's specialty insurers and reinsurers were expecting to get, much higher rates from a marketplace hungry for security. "I think insurance is no longer viewed as just a tax by our buyers;' said Brian Duperreault, Ace's chairman and CEO. Now, it is seen as an "absolute necessity."

But just as insurers are facing more demand, they will find a contracting supply of reinsurance to spread their risk. Reinsurers by and large will pay their attack-related claims, but the question for ceding companies will be "what the reinsurance market wants to do going forward in terms of trading," Duperreault said. He predicted that the amount of capacity leaving the reinsurance market would exceed the total loss from the attacks. "There will be companies that just say, 'No mas, I didn't sign up for this'" he said.

Holding More Risk

With reinsurance less available and less affordable, primary insurers will be forced to retain more risk, but they also will benefit from much improved rates and terms. Meanwhile, reinsurers will be attracted to risks that are more tightly underwritten than in the past. "The reinsurers will seek those who will give them the best opportunities," Duperreault said.

Both PartnerRe and RenaissanceRe have filed $400 million shelf registrations with the Securities and Exchange Commission, giving them options to rap the capital markets for greater capacity to meet the demand.

Reinsurers can expect to find scant capacity for retrocession, and its cost will strain the economic logic of buying the coverage, said Bruno Meyenhofer, COO for reinsurance at PartnerRe. He said that with high prices and low limits, the "true risk transfer" in retrocession will be "marginal," making reinsurance a business with little difference between gross and net writings.

The insurers and reinsurers widely agreed that the attacks would deliver a short-term blow to earnings, but they pointed to the hardening of the market--both before and after the tragedy--as providing the wherewithal to withstand the claims and return to healthy profits next year. With conservative investment portfolios and strong cash flow from the first half of 2001, companies said they would' have ample liquidity to pay claims, even if their own reinsurance recoveries take time to materialize.

For the year ahead, rising rates were expected to help recoup the losses. Thiele said PartnerRe should recover its losses by the end of 2002, with earned premiums at sharply higher rates starting to reach the bottom line in the second half.

Brendan Noonan