As the financial cost of the Sept. 11 terrorist attacks on New York and Washington, D.C., continues to rise, the ramifications for insurers remains unclear. Indeed, while carriers certainly have the financial reserves to cover estimated losses, industry observers say the wounds suffered from the devastating attacks will take many months to heal."While the hit to the economy will obviously put expense pressure on many companies, I think the disaster itself will have the effect of changing company priorities," says John Hodge, chief information officer for NAC Reinsurance Corp., Stamford Conn. The company is a subsidiary of XL Capital Ltd., which estimates its losses from the attacks at $700 million (see chart).
"I believe the demands put on (insurance) IT organizations will be even greater than it was already," he adds. "For many people, personal priorities have changed with the events of Sept. 11; it's reasonable to assume this will be true on the corporate level as well."
Historic loss
The estimated loss from the Sept. 11 attack dwarfs the more than $19 billion in claims that property/casualty carriers paid in 1992 for Hurricane Andrew. The total cost could go as high as $58 billion, according to Tillinghast-Towers Perrin, New York (see chart, pg. 18).
Although U.S. property/casualty insurers have more than $300 billion in statutory surplus, some insurers-and reinsurers in particular-could be "overwhelmed" by the extent of their losses, according to Tillinghast-Towers Perrin. In fact, the total cost of the Sept. 11 attack in New York-including clean-up efforts, the value of the lost buildings, lost business activity and loss of taxes derived from the more than 5,000 victims-could exceed $105 billion in the next two years, according Alan Hevesi, comptroller of New York City.
The financial impact on carriers-and the U.S. economy-will force carriers to rethink their technology plans, industry experts warn.
"The impact of Sept. 11 on IT spending will be seen over a period of one to two years," says Richard Roby, director of insurance research for TowerGroup, Needham, Mass. "Some of the funds earmarked for technology spending instead will be funneled rebuild statutory surpluses."
TowerGroup has lowered its forecasted growth for property/casualty IT spending to 2% over the next three years, down from 4.5%; IT spending by life insurers also will climb 2%, down from TowerGroup's earlier estimate of 5%.
"Reinsurers are really taking a big hit and they will have to rethink their technology spending plans," Roby says. "Most carriers have been slowing down their rate of IT growth for the past 18 months as the economy began to slump, so this spending slowdown is a reflection of the times."
Core systems' upgrade
However, carriers are planning on increasing spending on their core systems, according to preliminary results of a study on spending plans conducted by Gartner Dataquest, Lowell, Mass.
Carrier respondents polled before Sept. 11 indicated a strong desire to increase spending on middleware, e-business solutions and CRM, says Susan Cournoyer, a senior analyst with Gartner Dataquest.
"What's surprising is the number of respondents who say they want to replace core legacy systems such as policy administration and claims processing," she says. "They also indicated a desire to look into outsourcing some of their core processes, but they aren't committing funds to that just yet."
Prior to Sept. 11, Cournoyer predicted that carriers' IT spending growth would be in the low single digits. However, that outlook is uncertain.
"There will be a spending slowdown not only because of the claims payout but corporate challenges as well," she says. "Everyone's mind is now turning to what steps do we need to have in place to deal with a crisis, so business recovery and continuation and security will be major issues.
"Beyond the intermediate time frame, there's still a lot of interest expressed by CIOs that I've talked to about returning to IT projects that are high on their agendas," she adds.
One area that could receive increased attention is document imaging and management, says June Drewry, executive vice president and CIO of Chicago-based Aon Corp. The company had offices on floors 92 and 98 through 105 at Two World Trade Center.
"In areas where we had imaging technology, we didn't lose anything, but in those area where we didn't use the technology, those documents are lost," she says.
"I think spending on security and recovery technologies will increase, and carriers will get back to more of the basics. The amount of money spent on technology won't change, but priorities will," Drewry adds.
