The terrorist war on America has caused chaos in the global insurance industry. The situation is continuing to change quickly, and many observers say it will be weeks before the confusion dies down sufficiently to make the situation for insurers completely clear. Even then some of the life insurance, health and business interruption issues will take months more – perhaps years – to resolve.

(Unless otherwise stated, all amounts mentioned in this report are in $US.)

What is the expected cost to the insurance industry? The popular wisdom seems to be settling around the $30 billion mark. This compares with the cost of Hurricane Andrew in 1992, which came in at $40 billion in today’s dollars. AM Best says its discussions with insurers and reinsurers indicates losses of more than $30 billion. It says the “nature and location of the tragedy indicate that the majority of the losses will fall on the largest commercial carriers, their reinsurers and the London market”.

“While this event will be costly to these companies, AM Best believes the majority of these large insurance organisations will be able to meet their obligations without compromising their financial strength.”

Moody’s ratings agency isn’t so sure, stating that some reinsurers may not be able to honour all their claims “leaving primary insurers to shoulder a heavier load”.

The majors, however, are revising their estimates upwards by as much as 100% and admitting their earlier projections were way short. Munich Re raised its likely loss to $1.95 billion, and Swiss Re raised its estimate to $1.25 billion. They are record amounts for both companies. Munich Re said the figure represents 115% of last year’s reinsurance premiums.

A disturbing report from investment bank Morgan Stanley says it believes the most popular estimates of $25-30 billion are now at the “low end” of probable eventual losses.

It warns that the claims will place enormous strain on the Lloyd’s market, predicting it will sink some syndicates, “drain Lloyd’s Central Fund of cash and exhaust Lloyd’s insurance coverage”. It says the market is already staggering from a long series of losses. Lloyd’s has lost nearly $4.7 billion in the three years since 1998, and was hoping to turn the corner this year.

At the Reinsurance Rendezvous in Monaco two weeks ago, there was considerable discussion on the Lloyd’s market’s ability to raise sufficient capital to take advantage of increasing demand for liability business. Some syndicates had run out of capacity before the events of September 11.

That’s not good news for Australian brokers, who have turned increasingly to Lloyd’s as local insurers reacted to difficult risks by pricing themselves out of reach – a trend exacerbated in the local market by the HIH collapse in March. It planned to raise its premium income out of the Australian market this year after a record $A381.8 million last year.

The London market is rapidly tightening its conditions for new risks. Lloyd’s has already had its financial strength rating lowered by Standard & Poor’s from A+ to A, which means it has “strong financial security characteristics but is somewhat more likely to be affected by adverse conditions than higher-rated insurers”.