Few would argue that the destruction of the World Trade Center on September 11 was a colossal human tragedy. One of the most vexing business issues to emerge from the rubble is how the insurance industry will continue to provide coverage against terrorism in a world that suddenly seems much riskier. The Bush Administration on October 15 announced a series of proposals to help the insurance industry through this critical period. What will these proposals mean for insurers?

Most Emory professors interviewed by Knowledge@Emory say they support the Bush administration’s plan to help the industry provide coverage against terrorism. Some caution, however, that a hastily concocted remedy could have powerful side effects of its own.

Under the plan, insurance payouts would be capped at $12 billion in 2002, $23 billion in 2003 and $36 billion in 2004. The government would pick up the rest of the costs above those thresholds up to $100 billion. After three years, the Federal proposal calls for the government to leave the insurance business.

The government has already aided the industry indirectly by prohibiting families of attack victims from seeking punitive damages from the airlines and limiting damages to $100 million per airline. In addition, reinsurers say that they have sufficient resources to pay the claims resulting from the September 11 disaster.

Estimates vary about the extent of insured damage. "We know the cost is going to be in excess of $20 billion, we tabulated that. The amount that it could be, whether $30 billion or $70 billion – it’s way too early to tell," said Mark Puccia, a Standard & Poor’s analyst, in a recent conference call. He also noted, however, that following most major disasters, final claims tend to be double and even triple initial estimates.

Standard & Poor’s analysts also noted that life insurance companies also suffered a second kind of loss stemming from September 11. Unlike property firms, which tend to invest mostly in bonds, life insurance concerns typically weight their portfolios more toward equities, which suffered in the weeks following the attack.

Warren Buffett and other insurance industry leaders have said that terrorism represents a risk so vast that private companies can’t cover it. Russell Coff, an associate professor of organization and management at Emory University’s Goizueta Business School, disputed the claim. "I don’t see a reason why not," Coff said. "What’s difficult for them is assessing what the risk of loss is, but frankly, that’s a problem that they face all the time."

"Insurance companies face problems like that all the time because it’s not a static world, but usually these risks change fairly slowly. When we’re talking about changing weather patterns, we’re talking about a lot of years, and that reflects changes in risks and they have lots of time to adjust their premiums to reflect that kind of risk," Coff said.

Robert Chirinko, a professor of economics, agreed. "I’m inclined to agree with the Bush administration on this one… After a few years, the insurance market should have no problem bearing this sort of risk."

But he saw no problem with the government acting as a re-insurer as well for now. He said that there have been many examples of the federal government backing up troubled concerns, from communities to industries to countries. "In terms of long run problems, I guess I don’t see any. The government has been doing this a lot anyway," he said.

In fact, he saw bailouts stemming from the September 11 attacks as being potentially less troublesome than many because there’s less potential for moral hazard. "I don’t think industries are going to look for this kind of thing," Chirinko said.

Some observers have wondered about the impact on premiums as insurers try to recoup the amounts they will be required to pay out. While many people expect premiums to go up, what the federal backstop insurance should accomplish is to keep the premiums from becoming completely prohibitive.

Federal Reserve Chairman Alan Greenspan recently forecast sharp price increases in virtually all forms of insurance. "The shock of the tragedies at the World Trade Center and the Pentagon has reshaped those assessments of risk and required an abrupt realignment of prices in many markets to reflect the expected costs of operating in what we now recognize as a more hostile world," Greenspan said in Congressional testimony last week.

In addition, a recent study by Conning & Co., a Hartford, Conn.-based company specializing in insurance asset management, concluded that although the claims filed as a result of the September 11 incidents could exceed $25 billion for property, aviation, life and disability claims, premiums are also likely to go up. "The net effect of the catastrophe does appear to provide one piece of positive news for insurers. Commercial property premium rates, which had begun to show early signs of leveling, now are likely to grow at a more rapid pace," wrote Clint Harris, a Conning & Co. vice president.

One key intention of the Bush bailout plans for the insurance and airline industries has been to keep litigation to a minimum, through such mechanisms as a federal fund for victims’ compensation and liability caps for the airlines. But Frank J. Vandall, a professor at the Emory School of Law, believes that the effort to avoid the courtroom may not be in the ultimate best interests of society.

"Any kind of bailout of an industry suggests that everything you’ve been doing has been just fine," Vandall said. "Law suits are a means of taking people to the bar and forcing them to realize that what they’ve done in the past was not just fine and what they may be doing in the future is not just fine. By putting caps on the lawsuits or by insulating sectors of the economy from law suits, you’re cutting off that natural prophylactic activity that a law suit has."

Chirinko had a different view. "Lawyers are the only people who think litigation is a good thing. Sane people realize it’s a necessary evil," he said.

"Let me say in general that I think the information-revealing function of litigation is limited – a personal opinion. That said, it’s going to be even more limited in a case where issues such as national security and military information are involved. Do you think the Mossad [Israel’s intelligence agency] is going to come to the stand and tell you how it monitors potential Middle Eastern terrorists?" Chirinko asked.

Whatever the shortcomings of the underwriting system, some professors say that another kind of risk coverage has proven itself very strong in the past difficult weeks – the capacity of the insurance industry in particular and business in general to act as members of a larger community.

Andrew Ward, a professor of organization and management, said he saw the decision to pay on these claims as a good sign that the industry is taking its responsibilities seriously. He said that many policies specifically exclude acts of war and terrorism, and that executives’ decision to pay anyway places the industry in a favorable light. "Theoretically, they could probably have not paid out very much at all in all the possible claims, which would of course have left losses to the individuals and organizations affected by the attacks. I think that by and large the whole industry said, even though there are these clauses, we are going to try and pay these claims," said Ward. "I see that as a positive from their perspective."

That optimism should be tempered, however, with a touch of realism. One major disagreement between an insurer and a property manager has already resulted in a lawsuit. On October 23 the New York Times reported that Swiss Re, the main insurer of the World Trade Center, has filed a lawsuit against the facilities’ property managers to limit its payout. While Larry A. Silverstein, a real estate developer who held a 99-year lease on the property, is asking for $7 billion in damages -- $3.5 billion for each tower destroyed by each plane -–Swiss Re counters that the property’s destruction constitutes a single insurable event. As such, the company wants to limit its payout to $3.5 billion. This could be the first of several complex insurance disputes to arise during the coming months.

Still, Ward said he was impressed by the responses of many companies to the attack. One example was Amazon’s donation of site space to disaster relief efforts, although Amazon has troubles of its own. "It shows that companies are an integral part of people’s lives and that when there are tough times -- and even though companies themselves are facing tough times -- they’ve still responded in a positive way to addressing these non-business needs of their employees and others outside the organization. I see that as very positive response," he said.

Giuseppe Labianca, a professor of organization and management, cautioned against seeing the community-minded spirit as a new trend. He said many companies consider themselves to be members of the communities in which they live or do business. "I think that what you’ve seen is that maybe companies that defined their community as just a couple neighborhoods or the city they’re headquartered in have suddenly said, hey, we’re part of a much broader community within the U.S. The definition of community broadened as a result of the attacks," he said.