While 9/11 attacks and the COVID-19 pandemic are two very different events, there are parallels, especially from an insurance standpoint. Principally, both events were unprecedented and unexpected, to the nation and to the industry.
Twenty Years Ago: 9/11
The morning of September 11, 2001 will forever be etched in our collective consciousness as we looked on in shock at the horrific events that took place that day. It marks an inflection point for our nation: life before and after the terrorist attacks.
Everyone over a certain age knows exactly where they were that fateful morning as four airplanes were hijacked by terrorists who carried out suicide attacks against the United States. We watched incredulously as two planes flew into the twin towers of the World Trade Center (WTC) in New York City, a third plane hit the Pentagon just outside Washington, D.C., and the fourth plane crashed in a field in Pennsylvania. Nearly 3,000 people were killed during the 9/11 terrorist attacks.
Economic Impact of 9/11
Firefighters and other first responders and residents living near the World Trade Center became ill from exposure to toxic fumes and particles emanating from the towers as they burned and fell. By 2018, 10,000 people were diagnosed with 9/11-related cancer. The 9/11 Victim Compensation Fund was established and to date has distributed billions to the families of victims of the attacks and those injured.
The 9/11 attacks also had an immediate negative effect on the U.S. economy. On the first day of trading after the attacks, for example, the market fell 7.1% or 684 points. New York City’s economy alone lost $2.8 billion in wages in the first three months, with the heaviest losses occurring in finance and air transportation. The estimated cost of the WTC damage was $60 billion. The cost to clean the debris at the WTC, also known as Ground Zero, was $750 million.1
Traveling Post 9/11
Almost immediately, 9/11 also marked the beginning of the war against terrorism and the creation of the Department of Homeland Security and the Transportation Security Administration (TSA), which established airport screening protocols to mitigate the potential risk of another attack using commercial aircraft. Tickets and photo IDs were required to go beyond the screening area. Laptop computers and electronics had to be removed from carry-on bags for closer inspection. Shoes were taken off. Liquids were restricted to three-ounce containers. Conventional X-ray machines, which only detected metal objects, were eventually replaced with full-body scanners.2 Twenty years later this is the norm.
The Health Crisis that Is COVID
In late December 2019, China reported it was treating dozens of cases of pneumonia of an unknown cause. By mid-January 2020, the first death was reported by Chinese authorities and by the end of the month, the city of Wuhan was closed off as 17 others died and 570 were infected by a virus we would come to know as COVID-19. The virus spread quickly to Europe and in early February, the then-Trump administration declared a public health emergency and on the heels of that declaration, restricted global air travel.
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. A few days later, the Centers for Disease Control and Prevention (CDC) began to issue recommendations to limit gatherings to no more than 50 people. New York City announced it would close its public school system, which is the largest in the country with 11 million students.
The Pandemic Hits America
By late March, the United States became the country hardest hit by the pandemic, with at least 81,321 confirmed infections and more than 1,000 deaths. States began to issue stay-at-home orders. The CDC issued guidelines on mask-wearing and social distancing. There was a run on sanitizers, cleaning products, and toilet paper.
And, within just a few weeks, the pandemic put nearly 10 million Americans out of work, including a staggering 6.6 million people who applied for unemployment benefits in the last week of March. Sports competitions, concerts, and other events were cancelled; restaurants and hotels shuttered their doors due to state mandates.
The coronavirus also brought dramatic workplace changes, including the explosion of remote work for professionals. Work from home (WFH) remote work, Zoom, quaranteams, the new normal, pivot, and other words and phrases became our everyday buzzwords.
We now wear masks when traveling, have COVID test requirements, and are seeing vaccine mandates being issued by some employers, businesses, and public entities.
9/11, COVID and Our Industry
While the U.S. has experienced other terrorist attacks (the WTC truck bombing in 1993, the Oklahoma City bombing, and the Centennial Olympic Park bombing in Atlanta, to name three well-known events), 9/11 was an event of surpassing disproportion. At the same time, while there have been other known virus outbreaks (e.g., SARS, Ebola, and Zika), nothing on the scale of the COVID-19 pandemic has occurred in more than a century (since the 1918 influenza pandemic).
9/11-Related Claims Reached $40 Billion
The insurance industry was hit with 9/11-related claims estimated at some $40 billion, which represented a whopping 10% of its surplus at that time.
“The property side of the business took a tangible hit with a $3.5 billion face value for the WTC towers alone,” explains Wes Robinson, President, RPS National Property. In the aftermath of the event, a lawsuit ensued over whether the attack on the World Trade Center constituted one “occurrence” or two “occurrences.” The economic consequences of the coverage dispute were unprecedented, and it was lost on no one that an additional $3.5 billion “per-occurrence” property insurance program limit was at stake. Ultimately, the courts decided in 2007 to split the difference at $4.5 billion.
“You also saw coverage payments for the surrounding buildings and the four airplanes that were destroyed. When you start adding all of this up, including the workers’ comp and liability claims, you can see the extent of the capital hit from 9/11 on insurers, which no one ever anticipated,” Robinson continues.
The Formation of TRIA Post 9/11
Following 9/11, many insurers were unwilling to cover damages stemming from terrorist activities due to the financial unsustainability on the industry. As a result, the Terrorism Risk Insurance Act (TRIA) was passed to share losses between the federal government and insurance industry. With TRIA in place, insurers were once again able to include terrorism insurance in their policies. Without TRIA, the cost of coverage against terrorism acts would be too steep for most businesses to purchase.
“It’s important to note that TRIA was originally formed as a temporary federal program and has been renewed by Congress four times so far,” says John Head, President, RPS National Brokerage. “The program is necessary to continue to provide the safety net needed for both businesses and the insurance industry.”
To date, not one event since 9/11 (including the Boston bombing) has been certified by the government for TRIA to step in.
Pandemics Not Covered
The impact of COVID-19 on the insurance industry could have been devastating if pandemic coverage had applied. According to insurance trade group American Property Casualty Insurance Association (APCIA), the estimated costs from the resulting pandemic-related mandated business closures in terms of loss of income would have been anywhere between $251 billion to $450 billion a month which, if paid, would have rendered the insurance industry insolvent. Business interruption (BI) policies were never intended to pay pandemic-related claims; coverage applies only when actual physical property damage prevents a business from operating. Policies that did not already have specific pandemic exclusions before COVID-19 do so now.
“Restaurants, taverns, bars, hotels, entertainment and sporting events completely shut down, and construction nearly came to a standstill for six months,” notes Bill Wilkinson, President, RPS National Casualty Brokerage. “Revenue and payroll was down for a lot of businesses. Nearly all of the businesses in the French Quarter of New Orleans never reopened in 2020. The insurance industry could have never handled paying out on the staggering amount of lost income suffered by businesses.”
“I have heard the argument that the virus did not cause the BI loss, the government shutdown caused the BI loss; therefore, the government should be on the hook to backstop that exposure,” reinforces Robinson.
Just as with 9/11, lawsuits have been filed against carriers by businesses. Most of the lawsuits involve BI coverage and have favored the carriers, but in some cases the policyholder has won, depending on the jurisdiction.
Government Steps In to Help Business, Consumers with COVID Losses
The government has stepped in to help businesses and individuals with income losses resulting from COVID-19. Lawmakers have enacted six major bills, costing about $5.3 trillion, to help manage the pandemic and mitigate the economic burden on families and businesses. For example, financial assistance was provided to large companies and governments to the tune of $500 billion. Economic support ($380 billion) was offered to support small businesses, largely through the creation of the Paycheck Protection Program (PPP). Unemployment benefits, child tax credits, and direct payments to taxpayers were also provided.3
No Stop-Gap Program for Pandemics – Yet
To date, unlike with 9/11 and TRIA, the government has not established a stop-gap program to enable insurers to provide pandemic coverage for a future event.
“Prevailing wisdom is that we need a government program similar to TRIA for pandemic-related losses,” says Robinson. “The government introduced several TRIA-like bills within a couple of months of the closures and we saw private entities introducing proposals as well, but nothing has been decided as of yet. We need a government stop-gap program to allow the private industry to insure this risk.”
All three RPS colleagues, Head, Wilkinson, and Robinson, underscore the widespread reach of the pandemic and the difficulty in insuring such a risk.
“Insurance companies were never set up to cover this type of massive exposure on such a grand scale. The pandemic touched everyone and everywhere,” says Head.
“It’s all about scale,” Robinson comments. “Most catastrophic incidents are regional, but with the pandemic, insurers had no control over the risk. You have to look at setting up a government structure whereby the private industry can add an affordable premium surcharge onto a policy, with the buyer deciding whether or not to purchase coverage. If coverage is declined, there is no government assistance.”
There are other ways to potentially insure this unique exposure. Some policy forms have a small sublimit automatically included. Nowhere close to the real exposure, but it’s something. Another option to cover a pandemic is to utilize a manuscript policy form, which is very expensive.
“Take Wimbledon, for example,” explains Robinson. “The organizer had event cancellation coverage, which is not necessarily pandemic coverage, but the policy picked up this exposure. Wimbledon purchased the coverage following the SARS outbreak in 2003. It reportedly cost the organization $2 million per year and took 17 years before the coverage paid out when its tournament was canceled due to the pandemic. The policy paid off a large sum of money, but Wimbledon still lost money due to loss of income from its media rights, sponsorships, and ticket sales.”
Two Different Firm Markets
Prior to the 9/11 attacks, the insurance industry was in a soft market. In the aftermath of 9/11, which impacted every business line – property, liability, workers’ compensation, etc. – the market firmed.
“Much of the business was redirected to the Excess & Surplus Lines space,” says Robinson. However, the firm market didn’t last very long with rate reductions by 2003/2004.
Pre-COVID, the insurance landscape was completely different than before 9/11. The market was already firming when the pandemic hit in March 2020. That was triggered in 2017, after Hurricane Harvey hit Texas followed by Irma in Florida and Maria in the Caribbean, causing massive losses at a time when insurance rates were at their lowest in recent history.
“You began to see the market firming in late 2018 when Hurricane Michael hit the Panhandle,” explains Robinson.
At the same time, the casualty market was experiencing social inflation and nuclear verdicts, which impacted excess liability rates, with some businesses seeing double-digit increases and diminished capacity.
“Nuclear verdicts caused carriers to cut limits from $25 million to $5 million in the excess space, charging the same premium for lower amounts,” adds Wilkinson.
Executive lines were also seeing rate increases and coverage restrictions, depending on the risk. Additionally, the cyber insurance market in particular was hit by ransomware and other forms of attacks, and it became a situation of when, not if, losses would occur.
For now COVID hasn’t made a major impact on the casualty or workers’ compensation markets, unlike 9/11 which changed the course of the insurance market; however, there is still trepidation in the industry and the firm market remains.
“Expectations are that once the courts re-open fully, we will see nuclear verdicts continue and potentially get worse,” Wilkinson says. In fact, in late August a jury in Florida awarded $1 billion to the parents of a child killed in a vehicular accident involving two trucking companies.
“Most people who are waiting for their cases to go through the courts believe they have a good case with the jury on their side,” continues Head. “Going after entities with deep pockets will continue to be the norm post-pandemic, impacting the excess market.”
“If you’re an insurance company and unsure of how to navigate the future in a pandemic with so many unknowns in an environment already hard hit by consecutive natural catastrophes and massive lawsuits, you will opt to err on the side of being conservative,” says Robinson, recounting the challenging 2020 renewal cycle. “You deploy limited coverage amounts, continue to ask for rate adequacy (as you need it anyway) and, in some cases, exit entire classes of business.”
COVID Accelerates Digital Transformation in the Industry
The insurance industry already was moving toward greater utilization of online tools, but the pandemic accelerated the digital transformation. More business is taking place online.
“You can start a relationship over Zoom rather than having to drive a few hours back and forth from your office to a client or insurance carrier,” says Head. “COVID has shown all of us in the business that we can do things differently, which is a positive outcome. We will continue to have more Zoom meetings and prioritize what business we conduct in person versus online. Moving forward, we’ll see more of a balance between online and in-person interaction. People still want to collaborate face to face.”
Managing an Unprecedented Event
In managing such mass traumas and events, the most prescient advice for agents and brokers is to be prepared.
“Make sure that everything you do on any given day is preparing you, leading you up to being able to handle an emergency,” says Robinson. This means being there for your insureds, answering their questions, and helping them navigate through the crisis. “Seek out advice from more experienced professionals in your office who may have been through 9/11 or other difficult market cycles. Remain professional and remember everything is cyclical.”
Wilkinson advises agents and brokers to prepare comprehensive submissions early to ensure they get to the top of the underwriters’ work pile.
“Submissions are up 30% to 50% now, particularly as many admitted markets are not writing certain risks, so it’s critical to gather all the data and information the underwriters need to assess a risk. In addition, educate consumers about their coverages, including what isn’t covered and if coverage is available for certain excluded exposures and its cost.”
Lastly and most importantly, feel confident that the industry has weathered many events over the years and will continue to do so.
“We work in a creative industry and one that is very proactive once the unimaginable happens,” notes Head. “We will work together with the government, industry, and organizations to bring solutions to the market.”
1 "Study Confirms 9/11 Impact on New York City Economy." The New York Times
2 History Channel