=DJ European Risk Managers See Breakdown In Insurance System
By Jonathan House Of DOW JONES NEWSWIRES
BARCELONA (Dow Jones)--Risk managers at some of Europe's largest companies see a breakdown in the world's insurance system in the aftermath of the U.S. terrorist attacks of Sept. 11.
At the biannual meeting Wednesday of the Federation of European Risk Management Associations, or Ferma, attendees pointed to canceled policies, higher prices, reduced capacity and expected bankruptcies as evidence the insurance sector isn't providing them with adequate service. Ferma representatives said they were studying the creation of alternative insurance mechanisms to fill the void.
"The massive failure of insurers and reinsurers is obliging us to look for new solutions," said Eduardo Romero, the head of risk management for Spanish construction company Dragados SA (E.DRC) and chair of Risk Management Forum 2001, the Ferma meeting held this year in Barcelona.
Romero said that, following the U.S. attacks of Sept. 11, with damage estimates running as high as $50 billion, nearly all Ferma members have received letters informing them there will be no automatic renewals when their policies expire at the end of the year.
"We are expecting across-the-board price increases in the order of 15-20%," said Romero.
Ferma also expects many insurers will go out of business, although he declined to give any names.
In addition, most insurers have said they will no longer cover terrorism risk. Some have even canceled terrorism coverage, effective immediately, without refunding any of the paid premium.
"Some aviation liability policies have clauses that permit this type of action," said Romero.
Vicente Martin, risk manager for Endesa SA (ELE), Spain's largest electricity company, is worried about renewing coverage for the company's installations in Latin America, region with a long history of political turmoil and in which the Spanish company has 45% of its assets today.
"I remember back in the early '90s, when we first started investing in Latin America, power plants in countries which suffered from terrorism were surrounded by electrified fences, gun towers and minefields," said Martin.
"Maybe we will have to go back to that to get coverage for our facilities in some countries," said Martin.
In response to the difficult conditions in today's insurance market, Ferma is studying the possibility of creating a captive reinsurance company, to be funded by Ferma members, to provide themselves with their own reinsurance coverage.
Ferma has 1,500 members, many of Europe's largest companies.
Thierry Van Santen, the head of Ferma, said the organization is also studying the creation of a lobby group, together with insurers and reinsurers, to encourage the European Union to create a special European fund, similar to those already existing in countries like the UK and Spain, to protect against losses from extraordinary events.
The UK government created Pool Re in 1993 after a series of attacks by the Irish Republican Army in London. Financed by fees levied on insurance companies, it covers damages above a certain level of reinsurance.
Similarly, Spain has its Consortium of Insurance Compensation, funded by surcharges on a variety of insurance policies sold in Spain, which covers damages arising from extraordinary events, including acts of terrorism.
Also speaking at Risk Management Forum 2001, Jacques Blondeau, chairman and CEO of SCOR SA (F.CGV), one of the world's largest reinsurers, said he supported the idea of creating a European insurance protection fund.
"We should find a European solution...as we know terrorism has no frontiers," Blondeau said.
On the sidelines of the Risk Management Forum 2001, Blondeau told Dow Jones Newswires that most companies, including SCOR, would be excluding terrorism from corporate reinsurance coverage when policies come up for renewal at the beginning of next year.
"Terrorism is a man-made catastrophe, very difficult to predict and to calculate risk," Blondeau said.
The Scor CEO added that he sees price increases, of up 30% or 40%, for corporate reinsurance. But he said the market was already hardening before Sept. 11.
"Reinsurance prices had already risen 10% to 15% this year following a long period of underpricing," said Blondeau, adding that many new companies entered the market over the last few years, undercutting each other's prices.
Now many are withdrawing. Blondeau believes that some smaller players, unable to absorb their losses from Sept. 11, will go out of business, that many direct insurers will exit the reinsurance business and that reinsurers will be reducing their levels of coverage.
Blondeau expects that total corporate reinsurance capacity - the amount companies are willing to insure - will decrease by 15% to 20% as a result of the Sept. 11 attacks. |
