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The Lasting Effect of 9/11 on the U.S. Insurance Industry

August 08, 2017

We live in an age in which terrorism takes a broad range of forms from rudimentary Molotov cocktails and home-made bombs to cyber hacking.  As technologic capabilities soar, terrorism includes a wider variety of threats, and the U.S. government must add and adapt policy to address the ever-broadening term “terror.”

One of the most infamous acts of terror, the attacks of September 11, 2001, had tremendous economic impacts that spurred the creation of a variety of new U.S. policy. Much of that policy regards prevention efforts through the tracking of illicit financial activity enacted largely by the U.S. Department of the Treasury. [1] However, the economic disruption had such broad effects, particularly on the insurance sector, that policy was needed to counter the long-term effects of the catastrophe.

The relationship between financial institutions and acts of terror can materialize in three ways: the financial institution can be a victim of terror, a perpetrator of terror, or an instrument of terror. [2] When used as an instrument of terror, financial institutions can be used without their knowledge as a means to launder money and fund terror activities. [2] However, in analyzing the effects of 9/11, particularly on the insurance market, the relationship explored here will be that of the financial institutions as victims of terrorism.

Image: United States Current Account in Dollar and % GDP, 1996-2008. Source: U.S. Bureau of Economic Analysis.

Image: United States Current Account in Dollar and % GDP, 1996-2008. Source: U.S. Bureau of Economic Analysis.

Research from the International Monetary Fund denotes business facilities as “the preferred target of international terrorist attacks since 1998.” [2] For example, in 2000 approximately 385 targets were business facilities while diplomatic, government, and military sites were the targets of fewer than 50 attacks, respectively.[2] One study of 77 terrorist attacks that occurred in 25 countries over a time period of 11 years revealed that approximately two-thirds of the attacks incurred what was to be significant negative impact on at least one stock market considered and found that the highest market susceptibilities were insurance and airline markets.[3]

There is no standardized or agreed-upon approach to evaluate the full economic impact of a terrorist attack. Most agree that direct impacts – loss of life, loss of property, emergency response, restoration, temporary living expenses – as well as indirect impacts, mainly consumer and investor confidence, are included in a cost estimate. [2] However, some evaluations include factors such as resilience and extended linkages. These consequences complicate otherwise simply calculated costs such as business interruption. [4]

Further complicating cost analysis of the attacks are confounding variables such as a cyclical slowdown that had started mid-2000 [5] and the anthrax attacks later in September 2001 that worsened consumer and investor confidence. [6]

Image: Dow Jones Industrial Average, July-December 2001. Source: Wikimedia Commons.

Image: Dow Jones Industrial Average, July-December 2001. Source: Wikimedia Commons.

Taking the various timelines and circumstances into account, the unclear cost estimate for insurance companies as of March 2002 “ranged from $30 billion to $72 billion.” [7] Morgan Stanley summarized the extent of insurer responsibility as “the largest workers compensation loss in history (by multiples); one of the largest property losses in history; the most expensive business interruption loss in history (by multiples); the largest life insurance catastrophe loss in history (by multiples); and potentially one of the largest liability claims in history.” [7] This ‘clash event’ veered far outside a standard actuarial assessment of aggregate loss exposure and was widely acknowledged to have catastrophic, exponential impact. [7]

Ultimately, the impact on the insurance industry prompted many insurance companies to withdraw from the te  rrorism risk insurance marketplace. [7] The industry was racked with uncertainty regarding future attacks and risk exposure. The uncertainty had a variety of consequences in the insurance industry including drastic increase in premiums, a shift of risk among insured and their insurers, and the cancellation of construction projects. [7]

Additionally, insurance companies were affected by new regulation standards. The September 2001 attacks resulted in higher costs of transaction due to increased security measures and therefore higher insurance premiums. Companies also faced new compliance costs as a result of stronger international standards. [2]

The result was a law signed into law in by President Bush called the Terrorism Risk Insurance Act of 2002. [8] The law provides that the federal government and the insurance industry share the risk of loss from future terrorist attacks. The law has been reauthorized by Presidents Bush and Obama and the latest reauthorization sunsets in 2020. [9] The “intent of the act is to promote new construction and spur economic activity while creating a terrorism insurance market on which the industry could build, thus benefitting both the insured and the insurer.” [8]

The attacks 16 years ago play a leading role in the shape of the insurance industry today. The government still acts to co-insure the terrorism risk insurance marketplace through the Terrorism Risk Insurance Reauthorization Act of 2015. While many economists describe the effects as direct or indirect, short or long term, it could be that the economic effects of terrorism on the scale of 9/11 have no term limits.

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  [1] U.S. Department of the Treasury. “Terrorism and Financial Intelligence,” June 28, 2013. https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Terrorism-and-Financial-Intelligence.aspx.

  [2]Johnston, R. Barry, and Oana M. Nedelescu. “The Impact of Terrorism on Financial Markets.” Rome: International Monetary Fund, 2005. https://www.imf.org/external/pubs/ft/wp/2005/wp0560.pdf.

  [3] Chesney, Marc, Mustafa Karaman, and Ganna Reshetar. “The Impact of Terrorism on Financial Markets: An Empirical Study.” SSRN Scholarly Paper. Rochester, NY: Social Science Research Network, March 28, 2010. https://papers.ssrn.com/abstract=1579674.

  [4] Rose, Adam Z., and Brock S. Blomberg. “Total Economic Consequences of Terrorist Attacks: Insights from 9/11.” CREATE Homeland Security Center 16, no. 1 (2010). http://create.usc.edu/sites/default/files/publications/totaleconomicconsequencesofterroristattacks-insightsfrom9_0.pdf.

  [5] Parry, Robert T. Economic. “The U.S. Economy after September.” Economic, December 7, 2001. http://www.frbsf.org/economic-research/publications/economic-letter/2001/december/the-us-economy-after-september-11/.

  [6] Roberts, Bryan W. “The Macroeconomic Impacts of the 9/11 Attack: Evidence from Real-Time Forecasting.” U.S. Department of Homeland Security: Office of Immigration Statistics, August 2009. https://www.dhs.gov/sites/default/files/publications/ois_wp_impacts_911.pdf.

  [7] Caruso, Frank. “The Insurance Industry after 9/11: Planning for the Future.” Real Estate Issues 27, no. 1 (2002). http://proxy.library.upenn.edu:2299/docview/214001023?pq-origsite=summon.

  [8] Jarret, Joseph G. “The Business of Terrorism: The Terrorism Risk Insurance Act of 2002.” The Florida Bar Journal 77, no. 9 (October 2003). http://wx3zg9re3e.search.serialssolutions.com/?ctx_ver=Z39.88-2004&ctx_enc=info%3Aofi%2Fenc%3AUTF-8&rfr_id=info%3Asid%2Fsummon.serialssolutions.com&rft_val_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Ajournal&rft.genre=article&rft.atitle=The+business+of+terrorism%3A+the+Terrorism+Risk+Insurance+Act+of+2002&rft.jtitle=Florida+Bar+Journal&rft.au=Jarret%2C+Joseph+G&rft.date=2003-10-01&rft.pub=Florida+Bar&rft.issn=0015-3915&rft.eissn=2163-596X&rft.volume=77&rft.issue=9&rft.spage=63&rft.externalDBID=IAO&rft.externalDocID=108970648&paramdict=en-US.

  [9] ———. “Terrorism Risk Insurance Program,” May 3, 2017. https://www.treasury.gov/resource-center/fin-mkts/Pages/program.aspx.


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