State won't let insurers pass on terror-related costs

By Frank Cho
Advertiser Staff Writer

The terrorist attacks that toppled the World Trade Center towers will likely generate the largest losses ever seen by the U.S. insurance industry, but are unlikely to translate into significantly higher premiums for Hawai'i drivers and homeowners.

Wayne Metcalf, the state's chief insurance regulator, said he will not let insurers raise premiums in Hawai'i to help meet the cost of the losses in New York.

The insurance industry's latest estimates put total losses related to the Sept. 11 attacks at nearly $30 billion, nearly double the record $16 billion in losses incurred by Hurricane Andrew.

"We are not going to allow the insurance industry to spread its losses to Hawai'i," Metcalf told a hearing of state representatives and senators yesterday looking into the impact of Sept. 11 on Hawai'i's insurance industry.

Under state law, Metcalf has the authority to approve rate increases for insurers doing business in the state.

Bearing the brunt of the cost of the New York attack will be reinsurance companies such as Lloyd's of London and Berkshire Hathaway, the experts said. Such companies, which basically are insurance companies for insurance companies, are designed to absorb the costs of such huge calamities because they get hefty premiums and spread the risk.

"Nobody has a really firm handle on what the ultimate loss would be," said Allen Uyeda, president and chief executive officer for First Insurance Co.

Uyeda said the reinsurance industry has been struggling for several years. In 1999 and 2000, industry losses were about 15 percent greater than premiums. And for the second quarter of 2001, the industry suffered the worst second quarter in its history.

"To put the cost of reinsurance in perspective, about 20 percent of premiums that First Insurance collects goes to reinsurance," Uyeda said.

But reinsurance companies are waiting to find out if Congress will limit their liability on terrorist attacks before they issue their new rates. And that is causing problems for local insurers who are renewing policies now.

Paul Picardo, managing director for Guy Carpenter & Co., a Seattle reinsurance company, said 70 percent of reinsurance contracts are up for renewal Jan. 1. And many reinsurers already plan to pass those costs to insurance companies through higher rates.

But according to Metcalf, Hawai'i insurers spend less than 2 percent of each premium dollar on the cost of reinsurance. So even if their reinsurance costs double, as some speculate, Metcalf said the overall impact on consumer premiums will be small.

"I think the situation is very manageable," Metcalf said.

To try to manage the costs, some Hawai'i insurers have already asked the state for a terrorism policy exclusion. Exclusions for acts of terrorism are not common in the United States, but did begin creeping into the industry after the 1993 bomb attack on the World Trade Center, as well as the Oklahoma City bombing in 1995.

If approved, it would mean, for example, that a worker injured in a terrorist incident at the office would not be covered by workers' compensation.

"It's simply very bad public policy," said Metcalf, who has denied all the requests.

Reach Frank Cho at 525-8088, or at fcho@honoluluadvertiser.com