Gauging The Industry's Biological Terrorism Risk
What impact will the threat of terrorism have upon the business practices, and the solvency, of United States life insurance companies?
Life insurance executives must grapple with decisions on administrative, marketing, underwriting, pricing and reinsurance practices, as well as surplus levels.
Such decisions will vary with the level of risk being considered, such as the single incident World Trade Center disaster, compared to the threat of biological warfare being imposed on a larger, more national, basis.
Administrative concerns include the location of the home office and major service centers. Are they in major cities, or high-rise buildings, that have a high-profile risk with terrorism? Are back-up systems adequate?
Marketing concerns include the concentration of a company's business, including its geographic spread, mix of corporate clients, and any focus on upper-income clients.
Underwriting concerns could result in a more detailed look at an applicant's life. Besides examining skydiving, speedboat racing and other avocational interests, companies may review where an applicant lives and works, days spent per year in large cities, attendance at large sporting and concert events, foreign travel habits, etc.
Mortality pricing will not likely be affected by the World Trade Center disaster, but the possible impact of biological terrorism could justify higher pricing on term insurance and the mortality component of life policies.
Reinsurance needs are likely to be the most heavily examined concern throughout the life insurance industry, both for primary companies and for reinsurance companies.
Primary companies may wish to diversify their in-force business, and reduce risks concentrated in geographic areas, single business entities, and high-income insureds.
For example, should Presidential Life (with 33% of its life premiums written in New York), Jefferson-Pilot Life (20% of life premiums written in North Carolina) and Jackson National (15% of life premiums written in California) reinsure geographic risk?
Similarly, when a life insurance company insures a large number of employees in a single company, or a large number of members in an association which meets annually, the insurer might want to reduce its aggregate risk exposure.
Primary companies seeking to reduce their mortality exposure would then have to choose between catastrophe covers, coinsurance, or yearly renewable term reinsurance.
Or mortality pools might be formed, either directly by primary companies, or by reinsurers for primary companies, to reduce excessive geographic and business risks.
It is interesting to note that the 135 largest U.S. life insurers (each writing $100 million or more annually in individual life premiums) already reinsure 41% of their individual life insurance in-force.
It is prudent for a company to review retention limits per life insured, and to relate retention limits to both its insurance in-force and its surplus. This leads into the topic of solvency.
Terrorism risk in the insurance industry has been focused on the property-casualty industry, with the large losses it realized in the attacks on the World Trade Center.
While sizeable losses were realized on death claims and accidental death benefits in the life insurance industry, no concerns were raised about life insurance company insolvencies because aggregate claims did not represent a large percentage of any one company's surplus.
A larger threat posed to the life insurance industry is the possibility of a biological terrorist attack that causes a large number of deaths, either nationally, or where any one company's in-force business is concentrated.
Our review of annual statements showed that 473 U.S. life insurers had more than $1 billion face amount of individual and group life insurance in-force at Dec, 31, 2000.
In the event of a biological terrorist attack, how much of each company's life insurance in-force would have to incur death claims to exhaust a company's surplus?
If a primary company's reinsurers remain solvent, then one can look at PONIES (Percent of Net In-force Equal to Surplus) for that answer.
If there is a risk of the reinsurers not being able to meet their obligations, then a primary company must also look at POGIES (Percent of Gross In-force Equal to Surplus).
Table 1 shows the distribution of PONIES, and Table 2 shows the distribution of POGIES, for the 473 companies.
