Terrorist Attacks Will Make Workers’ Compensation Insurance More Expensive

The September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon may make workers’ compensation insurance more expensive. For the first time, businesses with large concentrations of employees may find that their workers’ compensation insurers will consider those big groups of employees as additional risk factors in case of future terrorist attacks.

This is the opinion of Christopher Oster and Michael Schroeder as set out in their January 9, 2002 Wall Street Journal article entitled “Workers’ Comp Insurance Now Harder to Get.” One of the Oster and Schroeder’s primary sources was a January 9 RatingsDirect article from Standard & Poor’s Insurance Ratings group entitled “Commercial Insurers to Cut Coverage for Losses Caused by Terror Attacks.”

“One lesson insurers learned from the Sept. 11 terrorist strikes—which are estimated to be costing the industry at least $40 billion—is that they have concentrations of risk that they hadn’t previously factored into their underwriting decisions,” write Oster and Schroeder. “Practically any type of workers clustered in a big group look increasingly like risky bets to insurance companies.”

Don Watson of Standard & Poor’s notes, “Though they haven’t yet, Congress may pass legislation that would help to cap losses to the [insurance] industry caused by terrorism. But many insurers will not want to provide significant coverage for terror losses regardless of government action.

“By their nature,” Watson adds, “terror losses are difficult to price, and the potential concentration within an insurer’s portfolio are such that it would be imprudent for insurers to write coverage without effective reinsurance. And right now, most reinsurers are not willing to provide large policy limits, much less uncapped coverage for terror risk. So some are thinking it’s better just to opt out of terrorism coverage altogether.”

Oster and Schroeder note: “Insurance rates already are rising in most lines of coverage, but workers’ compensation is unique in several ways. One of the most important differences is that insurers aren’t generally allowed by state insurance regulators to exclude coverage for war or terrorism.”

But thanks to the ongoing worldwide war on terrorists, not just property and aviation insurers will face increased risks. Workers’ compensation insurers will also.

“One of the lessons learned from Sept. 11,” reports RatingsDirect, “is that many insurers have concentrations of risk that they had not previously factored into their underwriting decisions. Employee groups of 1,000 or more lives are common across Corporate America and even globally. Terror attacks on large corporate sites could easily bankrupt insurers with workers’ compensation claims averaging $1 million or more.

“Reinsurance capacity for high excess workers’ compensation remains in short supply,” concludes RatingsDirect, “although, some of the new start-up reinsurers are looking to fill the gap, for a price that may be hard to support. Accordingly, many insurers may elect to cut workers’ compensation coverage with large accounts rather than assume terror risks implicitly.”

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