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The legacy of 9/11

Posted On: Sep. 10, 2006 12:00 AM CST

The legacy of 9/11

Robert P. Hartwig saw his colleagues at the Insurance Information Institute evacuate their lower Manhattan office on Sept. 11, 2001, in a storm of dust and debris from the collapsing World Trade Center towers.

But Mr. Hartwig, the III's chief economist and president-elect, recalls his most haunting memory of that day as an image: a woman's shoe, robin's egg blue, lying in deepening ash on a sidewalk near his building just blocks from Ground Zero.

For Robert Blumber, a managing director with Marsh Inc., it was seeing the north tower, where Marsh leased several floors, from his midtown Manhattan office after the first plane hit: "We went to the windows and saw the building on fire (and) said, 'My God, that's where our guys are."'

For Janice Ochenkowski, senior vp and director of global risk management with Jones Lang LaSalle Inc. in Chicago, it was the apprehension that she and her colleagues felt seeing planes from their 70th floor office windows once commercial flights resumed after the attack. "It was a very unnerving experience," she said.

The shock of the terrorist attack is still real five years later, though the loss itself has become more comprehensible as risk managers and insurers have worked to cope with an exposure most never imagined.

The months after the attack saw new government-backed and private markets develop in response to insurers' exclusion of terrorism risk--markets still uncertain in the face of next year's expiration of the Terrorism Risk Insurance Extension Act.

They also saw insurers trying to understand and control their concentrations of exposure to an extent they never did previously, using still-developing computer models. Risk managers also focused on security and terrorism risk mitigation in ways they never considered previously.

"Since 9/11, the whole issue of security and safety has become a bigger and bigger issue for companies around the globe," said Mr. Blumber, who is with Marsh's North American property practice. "Many organizations are more fully aware of what's going on around them."

Until they were surpassed last year by Hurricane Katrina, the 9/11 attacks on New York and Washington were the largest catastrophe ever recorded in any of the several affected lines of coverage, including property. The attacks remain the largest workers compensation and aviation losses on record.

The III's estimates total insured 9/11 losses at $35.6 billion, adjusted for inflation to 2005 prices. The estimate includes $12.1 billion for business interruption; $10.56 billion for property, including the destruction of the WTC complex; $3.85 billion for aviation liability; $4.4 billion for other liability; and $1.98 billion for workers comp.

The attacks--which killed 2,752 people in New York, 189 at the Pentagon in Washington and 44 in a jet that crashed in Pennsylvania--also caused tremendous personal loss for the industry. Marsh & McLennan Cos. Inc. lost 295 employees at the World Trade Center, while Aon Corp. lost 175.

Terrorism exclusions

One of the insurance industry's first responses to the attack was to exclude terrorism from policies that had routinely covered it at no additional cost. A limited market for terrorism coverage developed and Congress in 2002 passed TRIA, which provided a federal backstop for mandatory offers of terrorism coverage by private insurers.

The number of companies opting for TRIA property coverage has grown steadily since 2002, reaching more than 60% by the end of last year, brokers report in surveys of their clients. Many experts expect the market to be disrupted, though, as the Dec. 31, 2007, expiration of the act approaches. (see story, page 53.)

Insurers also responded to the loss by focusing on accumulations of property and workers compensation exposure in urban areas. Modeling companies developed new software to break geographic areas into grids, map the limits exposed at a given location and measure the impact of various types of terrorist attacks. (see story, page 1.)

Before 9/11, underwriters rarely asked policyholders or their brokers about employee concentration: whether, for example, a policyholder's 1,000 workers were in a single location or spread among several, said Don Bailey, chief operating officer of Willis North America in New York.

"It was a subject that just never came up," he said.

"What we see is (insurers) making every attempt to manage what is really an unmanageable exposure," said Julie Rochman, a senior vp with the American Insurance Assn. in Washington. "Who would have thought that office workers in a tower would present more of a risk than miners?"

Risk managers and their brokers, meanwhile, have likewise taken an array of steps to understand and reduce their companies' exposure to attacks.

Aon, for instance, has helped clients assess anti-terrorism measures and perform probable maximum loss analyses of property damage and business interruption at iconic buildings assuming different types of terrorist weapons, said Aaron Davis, director of Aon's National Terrorism and Property Resources unit in New York.

This type of PML modeling helps predict the potential impact of a terrorist attack, though not its likelihood, added Paul Bassett, executive director of Aon's terrorism and political risk operation in London.

"We can't do anything about the threat, but we can help (clients) understand it," Mr. Bassett said.

Jones Lang LaSalle, a Chicago-based commercial real estate manager, has taken several steps to mitigate its exposure, Ms. Ochenkowski said. These include reconfiguring buildings to reduce the number of entryways, increasing security at underground garages and limiting access to drive-up and drop-off points to reduce vulnerability to truck bombs, she said.

The company also added security guards, cameras, card key systems and tenant monitoring systems, she said.

Even such basic tenant safety efforts as fire drills are more common: "It was very difficult to get participation in fire drills for high-rise buildings before 9/11," but less so in the years since, Ms. Ochenkowski said.

Anti-terror measures like blast-resistant glass and reinforced bases also have become part of new construction. Perhaps the most striking example is New York's planned Freedom Tower, which is to stand on the former WTC site next to the Twin Towers' footprint and feature a 200-foot-high base of steel and concrete sheathed by panels of glass prisms.

Mitigating risk

Along with the need to safeguard employees and property, mitigation efforts are being driven in many cases by loan covenants and corporate governance concerns, as companies must show shareholders that they are taking "reasonable and prudent" steps to address terrorism risk, market observers say.

They've also helped companies line up terrorism coverage that otherwise might be more expensive or unavailable, brokers say.

If a company can show it's taking the risk seriously by assessing its PML exposure and by taking risk mitigation steps, it is more likely to get a bigger share of the market's capacity, Mr. Davis said.

Heightened security measures also reduce a building's chances of being hit, Mr. Davis said. Al Qaeda has shown since 9/11 that it will shift its focus from highly protected targets to "softer" targets that are easier to attack.

"Clearly, mitigation plays a great role in lessening the likelihood of a particular asset in your portfolio becoming a target," he said.

While Sept. 11, 2001, has had its own impact on policyholders' and insurers' view of risk, some observers see it as only one element in a chain of events that has altered risk managers' perspective on their work.

The corporate accounting scandals touched off by Enron Corp.'s 2001 collapse, hurricanes Jeanne and Charley in 2004 and Katrina in 2005, and war in the Middle East have all added new concerns for large corporations, Willis' Mr. Bailey said.

"There's just so much that's changed in the landscape over the last five years," he said.