Estimates of the total financial loss to the insurance industry after the Sept. 11 terrorist attacks that brought down the World Trade Center's Twin Towers aren't as large as originally predicted.

One year after the terrorist attacks in New York, Virginia and Pennsylvania, the Insurance Information Institute estimates that the total insurance loss from Sept. 11 will ultimately be about $40.2 billion. Original estimates had losses as high as $70 billion.

"9/11 is not only the biggest insured catastrophe ever, it is the most complex," says Gordon Stewart, president of the Insurance Information Institute. "The vast majority of claims for homes and autos have been paid, but commercial claims are more varied and complicated. While many have been helped, this recovery process will take years."

The institute estimate of $40.2 billion in insured losses includes:

• $11 billion (27 percent) in claims for business interruption;
• $10 billion (25 percent) in liability claims;
• $6 billion (15 percent) in property claims for damage to property, including vehicles, other than World Trade Center
• buildings One and Two;
• $3.5 billion (9 percent) in property claims for WTC buildings One and Two;
• $3.5 billion (9 percent) for aviation liability;
• $2.7 billion (7 percent) in life insurance claims;
• $2 billion (5 percent) for workers' compensation claims;
• $1 billion (2 percent) in claims for event cancellation and
• $500 million (1 percent) in hull claims for the loss of the four commercial aircraft.

Additionally, says Steve Dreyer, managing director of insurance ratings for Standard & Poor's, the wave of workers compensation and mental health claims that was expected to send insurance losses skyrocketing hasn't materialized. "The companies that have been getting [mental health] claims are cautiously optimistic about the volume," he says. Workers compensation claims were overestimated because of the very small number of persons suffering major injuries that kept them from working as a result of the attacks.

Don Griffin, assistant vice president for business and personal lines at the National Association of Independent Insurers, believes that the full effects of the World Trade Center attacks, even in workers compensation, have not yet been felt by the insurance industry. "Long-tailed" insurance exposures, such as workers comp, liability, and business interruption insurance claims, take time to develop, and can take even longer to resolve if they go to court. "This could drag on for years," says Griffin.

Key features of the Terrorism Risk Insurance Act

The legislation set a ground floor for insured lossess of $5 million for an event to be certified as an act of terrorism.

Each participating insurance company will be responsible for paying out a certain amount in claims — a deductible — before Federal assistance becomes available. This deductible is based on a percentage of direct earned premiums from calendar year 2002. The deductible is as follows:

• 2002 1 percent (from enactment through the end of the year)
• 2003 7 percent
• 2004 10 percent
• 2005 15 percent

For losses above a companys deductible, the Federal government will cover 90%, while the company contributes 10%.

If the Federal government pays for insured losses during the course of a year, the Treasury Secretary will be required to recoup the difference between total industry costs (individual insurers losses up to their deductibles, plus the industrys 10 percent cost share above the deductibles) and the following fixed dollar amounts per year:

• $10 billion for 2002 and 2003
• $12.5 billion for 2004
• $15 billion for 2005

Even with federal support, the insurance industrys share of the risk is substantial. For example, assuming that the baseline for the program is $125 billion in commercial insurance (direct premium written) and that the next terrorist attack amounts to $30 billion in commercial property and workers compensation loss, the total industry loss would be approximately:

• $11 billion for the remainder of 2002 and 2003
• $14 billion in 2004
• $20 billion in 2005

The recoupment will be accomplished through a surcharge on all policyholders. The surcharge cannot be more than 3% of the premium paid for a policy in a given year.

Losses covered by the program will be capped at $100 billion; above this amount, Congress is to determine the procedures for and the source of any payments, according to the Insurance Information Institute.