One year later. (Industry Strategies).

Sept. 11 was a watershed event for the insurance industry. Never before had one catastrophe affected so many lines of insurance--aviation, commercial property, disability, workers' compensation, group life. At the time of the disaster, the market was emerging from years of poor underwriting results. Sept. 11 accelerated the price firming. Now, a year later, the industry has responded: in the short term, by raising rates and, in the long term, by looking at risk like it never has before.

The terrorist attacks of Sept. 11, 2001, no doubt sent a shockwave through the insurance industry with the magnitude of the event. But even more numbing was the realization of how much havoc people are capable of intentionally causing. Insurers were used to predicting the damage that Mother Nature could wreak. But until Sept. 11, 2001, the industry hadn't really considered the destruction that organized terrorists could cause. Total insured losses from the events of that day have been estimated at between $35 billion and $55 billion.

At one time, terrorism was covered by most reinsurance contracts--mostly because it wasn't specifically excluded. But now it is difficult to secure terrorism coverage for some types of risks, such as for large national accounts or landmark buildings.

If reinsurance coverage is available on a buyback basis, the coverage is limited and the price runs between 5% and 20% of the coverage limit, according to Benfield Group. Coverage for nuclear, biological and chemical attacks is also scarce, but Benfield said it is available on a customized basis for specific clients.

The most dramatic change to the industry, in reinsurance and other lines, is that insurers are now much more likely to scrutinize their accumulation of risk, both on a geographic basis and by individual lines. Reinsurers are asking for more details from primary writers to paint the big picture of their total risks. For instance, they want to know how close their covered buildings are to landmarks; they want head counts of employees in specific offices; they want to know if risks from their large national accounts, and small and midsize accounts, are clustered.

Reinsurers' appetites for individual risks have shrunk, and while insureds ultimately may still find the same level of coverage, they are much more likely to have to invite a larger number of companies to the table to help consume the risk, said Swiss Re.

It's impossible to distinguish how this disaster alone affected pricing, terms and conditions. Other ingredients were already in the mix: The market already had begun to tighten; the downturn in the equity markets and low interest rates made it difficult, if not impossible, for insurers to make up underwriting losses through investments; and reinsurers already were refocusing on underwriting profitability instead of market share. Pricing and terms vary widely by line. But, in general, primary writers are likely to find they are paying more for less reinsurance coverage, with higher deductibles or coinsurance as well as lower blanket limits and more sublimits for specific perils or lines.

The aviation market illustrates how pricing already had begun to face pressure before Sept. 11. Increased demand for return on equity, tighter reporting practices from capital providers and regulators, and equity and credit ratings were driving up prices and tightening capacity. "The aviation market has much more awareness of the cost of providing capacity," said Doug Peterson, global practice leader for Aon Corp.'s aviation group. "Long-term policies have almost entirely disappeared. There have been reductions in the size of liability limits available, and there has been tightening of premium payment terms."

There also was an element of pre-Sept. 11 coverage that never got reinstated, Peterson said. "As part of their war liability coverage, the airlines had third-party coverage for nonpassenger terrorist liability. For example, the damage done to the World Trade Center was not passenger liability, it was property damage."

Meanwhile, one of the big unknowns to emerge for insurers in the weeks following the catastrophe was the potential cost of business-interruption claims. Estimates ranged from $5 billion to $20 billion, depending on how broadly business-interruption contract language is interpreted, and the final cost is still uncertain.

Part of the problem is that, in a way, business interruption--or business income--insurance goes hand-in-hand with commercial property coverage. The two lines usually come in the same package, and details about the value of the insured's property are vital to valuing business income loss as well. Daniel J. Ryan, a financial analyst with A.M. Best Co.'s Property/Casualty Division, said it isn't possible to rank business interruption insurers by premium. "Business interruption is a coverage component of commercial multiperil and is not disclosed as a stand-alone line of business," Ryan said. "There is no way for A.M. Best to determine cost per $1,000 of limit for this coverage."

One of the biggest battles continues to be waged on the floor of Congress: whether the federal government should play a permanent role as a backup insurer of last resort. Summing up the industry's prevailing position, Peterson said, "In my view, the actions of Sept. 11 were actions against the U.S., not against the airlines. I believe it is no different than natural disasters. Terrorist activity should be taken on by the federal government and not channeled to the business community." (See "Federal Terrorism Backstop Unresolved," page 42.)

Another lesson learned from the catastrophe is how many lines of business can be significantly affected by one event. This marks the first loss of catastrophic proportions for life insurance and workers' compensation. What follows is a detailed account of the impact of Sept. 11, 2001, over a broad spectrum of the industry.

Aviation

Aviation insurance has experienced perhaps the greatest upheaval of all insurance lines since Sept. 11, as underwriters in what already was a difficult market either headed for the exits or raised premium rates dramatically, while scaling back on the range of coverage. In particular, insurers are balking at writing liability coverage for terrorist or war risks.

The situation became so critical for airlines around the world that governments had to step in to provide back- up coverage schemes to keep them flying. While the U.S. Federal Aviation Administration, the British government and the European Commission continued to renew backup plans in 60-day cycles, the airlines themselves scrambled to fill coverage gaps. Equitime, a risk retention group licensed in Vermont, is designed to offer coverage for passenger and third-party war risk liability. A mirror plan called Eurotime is planned for European carriers--to provide third-party coverage but not passenger liability.

According to an insurance market overview published by broker Aon Corp. this summer, aviation product accounts are seeking rate increases ranging from 50% to 300%. Airlines are facing up to 100% increases in rates and additional expenses related to surcharges. Airports may see rates increase up to 200% on policy renewals, according to Aon.

John Tilling, deputy underwriter of Aviation Syndicate 340 at St. Paul at Lloyd's, said it is difficult to analyze pricing changes for airlines, since each airline has a unique set of variables. "Broadly speaking in relation to major airlines, hull all-risks, excluding war and allied perils, are attracting increases in excess of 50%, while liabilities attract rate increases of over 60%," Tilling said.

Immediately following Sept. 11, and probably as a result of demands made by reinsurers and stakeholders, direct underwriters substantially increased the price on all existing placements as well as renewals, Aon's Peterson said. They did so by instituting a surcharge applied to each passenger, and they did that through a policy that had a cancellation provision, permitting them to issue a seven-day notice of cancellation on the war liability segment of the coverage.

"For reinstatement, the airlines needed to agree that they would pay $1.25 per passenger [as an added premium for war risk]," said Peterson. "That applied to airlines throughout the world. The same war coverage is a part of manufacturers and airport policies--general aviation policies. Each, in order to get some level of coverage, had to pay an additional premium. So prices across the board went up, but probably none more dramatically than for the airlines."

Third-party liability has been limited for airlines to $50 million. It became difficult for other segments of the airline industry to purchase, and it was very expensive when they were able to do so. "Underwriters can quantify their exposure to passengers based upon the number of seats in an airplane, but they have no way to quantify damage to a target when a plane is used as a missile," Peterson said. "There's no appetite for that; it can't be underwritten and, therefore, can't be priced."

Third-party coverage is available in the commercial market, said Peterson, but it's expensive and hard to get. "I do know some airlines that have purchased up to $1 billion of coverage," he said.

Other markets have developed to provide that coverage, but for U.S. airlines at least, the coverage is provided by the FAA. The European Commission has been mirroring the U.S. government's strategy, extending every 60 days permission for its 15 member governments to provide third-party backup to their respective airlines.

Equitime, and its proposed European counterpart, Eurotime, are focused on that third-party, or nonpassenger, coverage, said Peterson, although Equitime may consider passenger liability coverage as well. Equitime, formed by the Air Transport Association--the biggest trade group representing airlines in the United States--would offer as much as $1.5 billion for passenger and third-party war risk liability. Peterson said such schemes can offer airlines something to fall back on should they need it, but it is likely not to become their main option. 'Airline people have told me that they do not really want to be in the insurance business," he said.

While the aircraft hijackings on Sept. 11 led to a host of security measures for airlines and airports, including reinforced cockpit doors, Peterson said there is not much that airlines can do to mitigate the skyrocketing insurance rates. "Underwriters say, 'If I am going to be getting into this risk, I am going to get a lot of money for it,'" he said. "'And if I can't get a lot of money, I'm not going to take that risk.'"

Peterson said airlines are rightfully unhappy with the premium rates and conditions imposed on them since Sept. 11. "No one can see their costs rise in any particular segment by five, six, seven times and not think that's unreasonable," he said. "This market goes through cycles, and the end of each cycle is an overreaction. Right now, we're in a pricing overreaction. Not too long ago, we came out of a severe underpricing overreaction."

There is some new capacity in the market, attracted by higher rates, said Peterson. On the other hand, some players have looked at the increased risk perception and decided they would be better off deploying their resources in other areas. "I would encourage anyone to get into the market now," he said. "You almost can't lose with the rates as they are now."

Business Interruption

Whatever the impact has been or will be on business interruption claims, industry participants agree that the effect on premium rates is significant--anywhere from 10% to 50%, according to a survey by the Council of Insurance Agents & Brokers, released at midyear.

"Since Sept. 11, prices have increased for property insurers, getting back to reasonable levels," said Ed Radzinski, vice president with Chubb Corp. and worldwide property manager for Chubb Commercial Insurance. "It really varies, depending on whether you're a middle-market insured or large market." He estimates that rate increases have ranged from 20% to 100%, for policies combining property with business-income coverages.

A lot of the pricing and underwriting pressure in the commercial market is coming from reinsurers, said Radzinski, noting that reinsurers want to know more about business-income exposures and valuation--especially how insurers develop limits on specific exposures.

"What we have seen is that insureds and insurers are much more concerned about evaluation for business-income insurance," he added. "There's much more concern about getting business-income worksheets, making sure they're updated, making sure the business is properly evaluated."

If anything, Radzinski said, Sept. 11 served to spotlight, both for the insurer and the insured, the aspects of business-income coverage that always have been important--proper valuation, detailed information and adequate coverage.

He said Chubb, which in 2001 published a client guide book on business-income insurance, always has taken business-income coverage seriously. The change since Sept. 11 is that the insured is now looking at risks more seriously. "Insureds are much more inclined to question their limits and make sure they have adequate building and property insurance and adequate business-income insurance," he said. "They are also much more interested in developing disaster plans."

A Chubb subsidiary, Chubb Services, provides disaster-plan development for clients--even those who do not buy Chubb insurance--and has seen an increase in business since Sept. 11, he said.

Charles Schmidt, a spokesman for the Alliance of American Insurers, confirmed that members of the trade group want as much detail as possible about an insured's business income, property and plan for disaster. "Underwriters want to see how detailed that plan is," he said. "And the nature of the business is more important--are they decentralized or all in one building? Do they have a backup computer system? Duplicate records off-site? In short, how quickly can they get back on their feet if disaster strikes?"

Commercial Multiperil and Auto

Accumulation of risk is the mantra commercial insurers adopted in the wake of Sept. 11. The catastrophe has changed the way underwriters look at some of commercial business--such as large, national accounts or landmark companies. Insurers are much more concerned about geographical concentrations of risk and concentration of business lines.

Both commercial multiperil and commercial auto lines were hardening when the terrorists struck, but the losses of the attacks intensified the market's tightening. Even writers who had no Sept. 11 exposures found reinsurance rates higher, terms tighter and income from investments falling--all of which added pressure to the already-hardening market. In some cases, primary writers responded by raising rates and deductibles and lowering limits.

Insurers also have been left to grapple with the new issue of terrorism coverage. While many have filed exclusions to not cover terrorism, a majority of states require companies to cover fire loss, no matter what the cause of the blaze. But for writers of small and midsize risks, it's really business as usual. Underwriting hasn't changed since September, because the maximum loss from a small business doesn't change if the loss results from a terrorist's bomb or a hurricane.

Workers' Compensation

The aggregation of risk at the World Trade Center made workers' compensation one of the insurance lines hit hardest by the Sept. 11 attacks. Insured losses for workers' comp are expected to range from $1.3 billion to $4 billion.

Terrorism coverage has left workers' comp insurers between a rock and a hard place. Insurers are not allowed to increase rates just for terrorism coverage. State laws, however, mandate that terrorism must be covered under workers' comp policies. But reinsurance companies have the ability to exclude terrorism, and many began doing so in January.

So, some insurers are looking for ways to reduce their concentration of risk or reduce coverage in some regions. As a result, several policyholders, particularly in large, metropolitan cities, reportedly are having a hard time finding affordable coverage. Other insurance companies, such as Liberty Mutual Group, are looking to reduce their risk through more diligent underwriting.

After Sept. 11, Liberty Mutual began tracking its workers' comp exposure throughout the United States, monitoring exposures in the larger metropolitan areas more closely, said Brian Melas, senior vice president of commercial markets for Liberty Mutual.

The company also started taking a closer look at the risk by gathering more information on employee locations, which is a modeling technique similar to those used by property insurers. "We've gathered as much information on existing business as new," he said. The demographic information then can be evaluated, not just for a terrorist event, but for any large natural catastrophe--such as an earthquake in California--that could cause significant losses to a company, he said.

Underwriters at Liberty Mutual also are looking past the physical locations for information on steps that insured companies have taken to prevent or minimize their losses. For instance, Liberty Mutual wants to know about a company's contingency and evacuation plans, as well as what risk-management programs are in place.

Disability

The top disability insurers have not changed their underwriting drastically, but they are now more aware of the difference in exposure between an employer with 10,000 employees on one campus and one whose facilities are spread across the United States. And they are watching closely as the federal terrorism backstop debate unfolds, hoping that provisions will be made for disability.

UnumProvident, the leading disability insurer, has a continuing goal to diversify within set exposure limits. If coverage goes above its previously set exposure limits for a particular industry, geographic ZIP code and dollar amount per employer, the insurer seeks reinsurance. The strategy has been standard operating procedure for a couple of years, and it's a good way to handle risk post-Sept. 11, said Mike Temple, vice president of large case underwriting with Unum Life Insurance Company of America. Although the company has not stopped writing any risks and pricing hasn't changed, UnumProvident traditionally hasn't covered any acts of war or terrorism.

Hartford Life Insurance Co. is factoring the economic downturn into its underwriting and continuing to be prudent in its risk management, said Liz Zlatkus, executive vice president.

Cigna is reaping the benefits of foresight. After months in development, the company launched a lowcost disability product last September, coming in at a price lower than most competing policies, spokeswoman Gloria Barone said. The new product is targeted to companies with 500 to 5,000 employees.

Group Life

Insurers are taking advantage of the Sept. 11-related surge in demand for life products. Industry reports say applications for the insurance were up 9% or 10%, said Michael Witwer, vice president of group life for Metropolitan Life. MetLife is allowing some groups to increase their coverage on a one-time basis without filling out a health form or doing any other type of underwriting. It's an area MetLife had been concentrating on before Sept. 11, when published surveys suggested that 53% of the population were underinsured. Coincidentally, the company introduced an online calculator Sept. 10 to help consumers compute how much term life insurance is right for them.

Underwriting changes have been modest for the top three group life writers in the United States.

At Prudential Insurance Company of America, the new group life product excludes biological and chemical events, said Rod Hook, senior vice president of finance and group insurance. Pru's underwriters aren't asking for any additional information, but clients have been making their maximums higher, he said.

A couple of years ago, Unum Life began looking at concentration of risk--setting coverage limits based on the industry, geographic ZIP code and the dollar amount per employer. Above those limits, the company buys reinsurance. The company also maintains a good mix of small, medium and large case sizes.

"It's just like a bond-fund manager will manage the mix of a mutual fund," Temple said.

On the other hand, underwriting at MetLife has remained static, because the company always had excluded war and terrorism risk from its accidental death and dismemberment coverage, which is typically packaged with group term life coverage.

When it comes to pricing, however, "it's a completely new ball park," Hook said. Catastrophic coverage costs have gone up dramatically--1,000% or more, he said, declining to say by how much Pru has raised its prices. Unum Life has increased prices 3% and 5% for special risk-type products, Temple said. MetLife's prices haven't changed, because the company doesn't rely extensively on reinsurance, Witwer said.

[GRAPH OMITTED]

Summary of Estimated Insurance Payments for Losses Related to Sept. 11

                                      Estimated
Type of Insurance                      Payments

Life Insurance            $4 Billion-$6 Billion
Commercial Property                >$17 Billion
Personal Property
 (Contents)               $2 Billion-$3 Billion
Automobiles                         $90 Million
Airline Liability                    $6 Billion
Aircraft Insurance
 (Broad Hull Coverage)             $434 Million
Workers' Compensation   $1.3 Billion-$4 Billion
Business Interruption
 Insurance              $5 Billion->$18 Billion

Total                   $36 Billion-$54 Billion

Source: DRI-WEFA report
Aircraft All Perils, Top Writers--2001

($ Thousands)

                                          Direct
                              % Market  Premiums
Groups                           Share   Written

American International Group     21.59  $317,850
HCC Insurance Holdings Inc.       9.44   138,947
XL America Group                  7.48   110,063
Ace NA Group                      7.25   106,765
CNA Insurance Cos.                7.15   105,286

Source: A.M. Best State/Line Products
Commercial Auto, Top Writers--2001

($ Thousands)

                                    Direct
                      % Market    Premiums
Groups                   Share     Written

Zurich/Farmers Group       6.8  $1,625,381
Travelers/Citigroup        5.5   1,314,723
St. Paul Cos.              4.6   1,103,166
CNA Insurance Cos.         4.3   1,026,241
Progressive Group          3.5     841,430

Source: A.M. Best State/Line Products
Commercial Multiperil, Top Writers--2001

($ Thousands)

                                             Direct
                               % Market    Premiums
Groups                            Share     Written

Zurich/Farmers Group               8.18  $2,069,884
Travelers/Citigroup                7.41   1,873,608
CNA Insurance Cos.                 5.50   1,390,467
Hartford Insurance Group           5.37   1,359,899
Chubb Group of Insurance Cos.      4.02   1,015,929

Source: A.M. Best State/Line Products
Workers' Comp, Top Writers--2001

($ Thousands)

                                               Direct
                                 % Market    Premiums
Groups                              Share     Written

State Comp. Ins. Fund of Calif.      9.67  $3,638,077
Liberty Mutual Insurance Co.         7.93   2,985,751
American International Group         5.11   1,921,250
Zurich/Farmers Group                 4.92   1,851,730
CNA Insurance Cos.                   4.46   1,679,884

Source: A.M. Best State/Line Products
Reinsurance, Top Writers--2001

Ranked by total gross premiums written.

($ Millions)

                              Total Gross  Total Net
                                 Premiums   Premiums  Property/
Groups                            Written    Written   Casualty

Munich Re -
 Segment Reinsurance              $19,666    $16,614    $11,822
Swiss Re Group *                   18,569     16,982     10,095
Berkshire Hathaway Group           11,984     11,984      9,979
GE Global Insurance Holdings       10,366      7,392      5,551
Hannover Re                        10,195      6,289      4,470



Groups                        Life/Health

Munich Re -
 Segment Reinsurance               $4,792
Swiss Re Group *                    6,887
Berkshire Hathaway Group            2,005
GE Global Insurance Holdings        1,841
Hannover Re                         1,549

* Includes full-year estimate for Licoln Re acquisition in 2001.

Source: A.M. Best Co.
Group Life, Top Writers--2001

($ Thousands)

                                              Direct
                                % Market    Premiums
Groups                             Share     Written

Metropolitan Life & Affiliated     19.38  $5,065,125
Prudential of America Group        11.98   3,129,925
Hartford Life Inc.                  7.01   1,833,056
Cigna Corp.                         5.54   1,448,449
UnumProvident Corp.                 5.43   1,419,853

Source: A.M. Best State/Line Products

RELATED ARTICLE: Cat Models Look to Predict Loses From Future Attacks.

Catsatrophe modelers are insurers' first line of defense in accurately measuring risk, and they have been busy since Sept. 11, 2001, trying to estimate the potential damage of another terrorist attack.

Modeling potential terrorist attacks helps insurers estimate how different lines may be affected by a single event, plus it helps to estimate how much exposure insurers have in a specific area. "Plotting your concentration of risk on a map is better than a list, but doesn't tell you what your potential losses are. Using modeling, you can look at the relative likelihood of damage across different events and different lines," said Jack Seaquist, terrorism model product manager at AIR Worldwide Corp.

Insurers can use the model to help mitigate their exposures by diversifying their business geographically and limiting the number of accounts in a specific area. Cat modelers such as Eqecat Inc. and AIR have built terrorism models to help insurers predict losses from different types of terrorist attacks, including chemical, biological or nuclear attacks as well as bombs and other explosions. Modeling weather and wind conditions also is important in the event of some attacks, because the wind could spread an airborne chemical or biological agent. Estimating the potential damage from a terrorist attack is in some ways similar to predicting damage from natural hazards, such as earthquakes, but it's much more difficult to estimate the frequency or what targets are most likely to be hit, Seaquist said.

"There's no physical science behind [frequency]. You can't extrapolate from past history, so we use expert opinion and codify that," he said. Using experts to predict what terrorist groups are likely to do and what they are capable of doing, AIR has built a database of possible targets, in much the same way a database of potential earthquake sources was developed, based on fault lines and historical seismic activity.

Eqecat developed its model to estimate the extent of death and injuries from potential terrorist attacks involving bombs, airplane crashes, nuclear devices or chemical and biological agents, such as anthrax and chlorine. It has combined that with infrastructure--tall buildings, high-profile government buildings, military facilities, dams and nuclear facilities--so the company can run damage estimates of potential scenarios and how they would affect surrounding areas.

"The frequency, when you put it down to a specific area, is very low The chance of a terrorist hitting a specific spot is very low But the probability of a terrorist attack happening somewhere in the country is very high;' said Rick Clinton, president of Eqecat. "We don't know where and we don't know when, but we know it's going to happen."

Both catastrophe modelers agree that urban areas are the most likely potential targets, and bombs are by far the most common weapon used by terrorists. Nuclear weapons would cause the most damage, although it's difficult for countries--let alone a terrorist group--to master that technology, Clinton said.

The greatest risk is not necessarily the worst weapon, agreed Uday Virkud, senior vice president of AIR. "The worst scenario for the insurance industry would be a significant event happening in a highly exposed or populated area," he said. Or it could be something that could spread to a large area, causing property to be destroyed, rebuilt or abandoned--even if people were evacuated or inoculated, Seaquist said.

Some of the findings may be surprising. "Everyone thinks because of the planes in the World Trade Center that being high in a building is a bad thing. That's not necessarily true," Clinton said. A car or truck bomb-- which is likely to cause more damage and injuries closer to the ground--is a more likely risk, he said.

Steps can be taken to mitigate any risk, Clinton said. For instance, installing a film across windows can reduce the risk of injuries due to flying glass. By putting a barrier around a building, a company can keep potentially dangerous cars and trucks away.

Understanding the risks is key to underwriting them. For example, Hurricane Andrew helped insurers understand that they didn't have enough information to know the risks they were taking: They didn't know if an insured building was 10 miles inland or right on the coast, Virkud said. "What has been happening in property over the last 15 years will be extended to other lines. Before Sept. 11, people didn't have the data or the need for data. Now there will be a more careful selection of risk?."

Property Catastrophe Risk, Top Writers--2001

($ Thousands)

                                     Direct
                      % Market     Premiums
Groups                   Share      Written

State Farm Group            15  $21,084,223
Allstate Ins Group         8.3   11,648,518
Zurich/Farmers Group       7.1    9,988,926
Nationwide Group           3.8    5,302,321
Travelers/Citigroup        3.4    4,825,687

Source: A.M. Best Co.

The New Bermudians

Nine new insurance companies have been started in Bermuda since the terrorist attacks of Sept. 11, 2001, to take advantage of rising rates in the property/casualty market.

Allied World Assurance Co. Ltd.

Top Executive: Michael Morrison

Investors: American International Group, Chubb Insurance Co., Goldman Sachs

Capitalization: $1.5 billion

Lines of Business: Commercial property and casualty lines of business, including general and professional liability insurance, energy transportation and commercial real estate property risks.

A.M. Best Number: 84808

Arch Reinsurance Ltd.

Top Executive: Paul Ingrey

Investors: Warburg, Pincus and Hellman & Friedman

Capitalization: More than $1 billion

Lines of Business: U.S. casualty treaty, U.S. and non-U.S. catastrophe treaty, property risk and proportional property risk.

A.M. Best Number: 75169

Axis Specialty Ltd.

Top Executive: John Charman

Investors: Private-placement equity through Trident II, managed by MMC Capital, a Marsh & McLennan subsidiary.

Capitalization: Initial $1.7 billion; additional $400 million credit line secured in April 2002.

Lines of Business: Short-tail primary and reinsurance lines of business. Primary lines include marine liabilities, marine hull, energy, political risk, aviation war and marine war. Reinsurance lines include property catastrophe, property, marine and aviation.

A.M. Best Number: 84766

Davinci Reinsurance Ltd.

Top Executive: James N. Stanard

Investors: Renaissance Reinsurance, State Farm Mutual Insurance Co., Max Re Capital

Capitalization: $500 million

Line of Business: Property catastrophe.

A.M. Best Number: 84749

Endurance Specialty Insurance Ltd.

Top Executive: Kenneth J. LeStrange

Investors: Aon Corp., Zurich Financial Services, Golden Gate Capital

Capitalization: more than $1.2 billion

Lines of Business: Property, casualty, catastrophe, excess workers' compensation, aviation and space reinsurance, primary property, excess casualty and directors and officers insurance.

A.M. Best Number: 84835

Goshawk Reinsurance Ltd.

Top Executive: N/A

Investors: Goshawk Insurance Holdings

Capitalization: $140 million

Lines of Business: Marine excess-of-loss, marine retrocession, nonmarine catastrophe, aviation excess-of-loss and finite reinsurance.

A.M. Best Number: 84802

Montpelier Reinsurance Ltd.

Top Executive: Anthony Taylor

Investors: White Mountains Insurance Group, Benfield Group, Gilbert Global Equity Partners

Capitalization: $1 billion initially; planned to offer as much as $250 million of stock in an initial public offering.

Lines of Business: Property catastrophe reinsurance, commercial property insurance and reinsurance and property retrocession reinsurance.

A.M. Best Number: 84809

Olympus Reinsurance Ltd.

Top Executive: Sheila Nicoll

Investors: Leucadia National Corp., Gilbert Global Equity Partners and others through reinsurance intermediary Gill & Roeser

Capitalization: $500 million

Lines of Business: Property catastrophe and short-tail lines.

No information was available for Queens Island Reinsurance.

London Market: The Subscription Prescription

It was a summer afternoon, the July 1 policy renewals were done, and in any other year, Lloyd's would have been a sleepy corner of the City, London's financial district. But when Robert Childs visited there, he found the landmark office tower buzzing with activity.

"It could have been Christmas," said Childs, director of underwriting at Hiscox plc, likening the midsummer bustle to the busiest renewal season of the year. In the months since Sept. 11, brokers and underwriters at Lloyd's--and throughout London's international insurance bazaar--had scarcely found time to catch their breath. The turmoil in the global insurance market was producing a flood of risks that needed to be placed, many of them through the subscription mechanism that has long been a staple of the London market.

Several months earlier, Childs and two of his Lloyd's colleagues predicted in an interview that subscription business, through which underwriters accept percentages of a risk until it's covered completely, would snap out of a long decline on the heels of Sept. 11 losses. Primary underwriters no longer could simply write entire risks and pass them along to willing, capital-heavy reinsurers.

Subscription underwriting had faded in a soft market backed by cheap, available reinsurance and soaring equity-market returns, but it would play a role--with brokers at the center--in averting paralysis in the London market. The effect wasn't across the board, but the underwriters' forecast was close to the mark. "The subscription market has reappeared," Childs declared.

"One of the good things to see is that the people who really know what they're doing in the risk-transfer market have stepped up to the plate," said Andrew Beazley, a director and active underwriter at Beazley Furlonge Ltd. And as syndicates and companies are weaned off bargain-priced reinsurance, there is a "whole new generation of underwriters that are being built," Beazley said.

Some initial post-Sept. 11 perceptions-that certain risks, such as terrorism, would never be insurable--have softened, Beazley suggested. Underwriters, he said, are "slowly broadening their horizons, but with huge discipline," and "starting to employ quite sophisticated thought processes and modeling." The result is a "calculated braveness" in underwriting, he said.

Even some stand-alone terrorism risks are becoming insurable after a "very laborious" underwriting process, Beazley said, with aggregate exposures being tracked by ZIP code. Where the subscription market comes into play, he said, is in turning the small steps of individual underwriters into measurable progress. "Everyone taking one small step adds up to quite a large stride," Beazley said.

Brokers, he said, have played an important role in knitting together various interests to assemble coverage for customers who need it. And as much as buyers needed brokers, the brokers needed London.

"The London market has been swamped with business," said James Few, now an underwriter with the newly formed Wellington Re. He was still working on the primary side of the business with Wellington Underwriting plc in the weeks after Sept. 11, and he saw a market where syndicates and companies could write as much business as they wanted--at soaring rates.

The market was overwhelmed, and some syndicates and insurers responded by reducing the size of the "line," or percentage of a given risk, they would write, Few said. A risk that could have been absorbed by one or two writers now needed six or seven to fill out the "slip"--the form circulated by brokers seeking to place coverage in the subscription market. With more writers on each slip, terms and conditions were tightened to keep all of the underwriters happy.

Reinsurance Trends

While the primary market enjoyed a bonanza that has diminished only slightly, different forces were at work in the London reinsurance market, especially for the treaty reinsurance that covers entire portfolios of business. One factor was that customers, resigning themselves to higher prices, were much more interested in their insurers' security.

In the early months after Sept. 11, Lloyd's in particular was under close scrutiny, with some observers openly questioning whether the market could make it through a cash-flow crunch. That led to a "flight to quality" in reinsurance that hurt the London market in the early going, although those fears have since subsided, Few said. The fledgling Wellington Re is an important symbol of resurgence in the London reinsurance market, he said.

Some underwriters, rather than taking smaller lines, are controlling their potential losses by monitoring their aggregate exposures more closely, said Paul Jardine, director of financial products at Catlin Underwriting Agencies Ltd. This favors larger players that can take sizable portions of a risk, Jardine said, although smaller underwriters also are returning to the market. Still, there are capacity shortages in some sectors, he said.

Stephen Cane, chief executive of reinsurer Alea London Ltd. and chairman of the International Underwriting Association of London, cited casualty lines such as U.S. nursing homes, medical malpractice and directors and officers coverage, as being especially distressed.

Cane also noted another force working against the dispersion of risk through the subscription market--consolidation, in primary insurance and even more so in reinsurance. That trend has produced fewer but bigger players, which are able to retain more risk, he said. The exception, Cane said, would be on risks so large that they simply exceed any one entity's capacity.

Beazley said subscription business is hardly unique to London, also existing in the United States and Bermuda. Still, he said, the London market has a long history, and "the density of the subscription market in London is unique."

Jardine said Sept. 11 proved that the U.S. market can't handle the sum total of its exposures without help. "It just refocused people on the fact that you have to lay off risk," he said.

Federal Terrorism Backstop Unresolved

Insurers and reinsurers say the federal government needs to bring some measure of certainty to the great unknown that is the next terrorist attack by putting up money and taking some of the risk for reinsurance.

Insurers have said all along they were able and willing to pay for losses from the terrorist attacks of Sept. 11--but that's where the promise ends.

As the House and Senate have wrangled over whether to put up the money, how much money and the mechanism for providing the money, the reasons the money is needed haven't changed in a year.

Insurers need the certainty of knowing the limits of the risk they take on. Reinsurers also need that predictability, but are freer to pull out of the marketplace and have exercised that freedom.

"We want to see the reinsurers come back into the market to pick up some of the individual company deductible, which they might be willing to do if there was a limit on the risk," said Deborah Sherno, a spokeswoman for the Alliance of American Insurers.

That's why the industry prefers the federal terrorism backstop bill passed in the Senate. It calls for insurers to pay a deductible based on market share applied to a $10 billion industry aggregate. If a company suffered losses that exceeded its deductible, but the industry aggregate loss didn't exceed $10 billion, the federal government would pay 80% of the company's losses, with the insurer paying 20%. Should a terrorist attack result in aggregate losses exceeding $10 billion, the government would pay 90%.

The key is that individual companies would pay losses based on market share. This per-company trigger allows insurers to know what their individual exposure would be, and it allows them to prepare.

Small and midsize companies are protected, because only 21 commercial writers in the United States have annual net written premium of more than $1 billion, said Julie Gackenbach, director of government relations for the National Association of Independent Insurers.

But there are some 1,700--83% of the commercial writers in the country--with less than $100 million of annual net premium written. "A widespread loss may not reach $10 billion, but it could wipe out smaller companies," she said.

The backstop may not solve all the market displacement problems since Sept. 11, but the American Insurance Association feels it would help a great deal by giving insurers something they don't have when it comes to insuring terrorist risks--a clue about their probable maximum loss, said Gary Karr, an AIA spokesman. "How long it would take is not known, but we think a lot of companies out there want to be involved in the marketplace. They want to service their customers. Companies will chase this business if their underwriters have a risk box they can work with," he said.

Fine Arts

Fritz Koenig's outdoor sculpture "The Sphere," which had marked the plaza at the World Trade Center, was one of the few public artworks to survive the terrorist attacks. "Since Sept. 11, the process of securing fine arts insurance has become more cumbersome for everyone involved," said Dietrich von Frank, president and chief executive officer of Axa Art Insurance Corp., New York. An increasing number of large collections, such as those owned by corporations and museums, require more than one insurer to provide the capacity. Reinsurance for catastrophic risks is difficult to find and commands a high price; consequently, the cost of primary insurance is rising 20% to 25% in our line of business, von Frank said. Von Frank estimates $100 million worth of artwork was destroyed or damaged in the World Trade Center catastrophe.Axa Art's losses totaled about $14 million gross, he said.