VCU news

By Mike Frontiero
VCU School of Education

RICHMOND, Va. – Understanding risk and how to manage it are no longer exclusively the concerns of experts and insurance professionals. Many people at the personal and commercial level now feel exposure to risks more viscerally since the terrorist attacks of Sept. 11, 2001. Virginia Commonwealth University School of Business professor Etti G. Baranoff, Ph.D., introduces this new world of risk and risk management in her recently published textbook “Risk Management and Insurance.”

“In the first years of this century, the terrorist attacks on the World Trade Center and the Pentagon, and the accounting scandals of Enron and WorldCom all highlighted the importance of risk management and insurance,” said Baranoff. 

The textbook, designed to reflect the dynamic nature of the field of risk management and insurance, serves as an introduction to the field for students, a desktop reference for industry professionals nationwide and for any consumer interested in understanding insurance better. 

“Before Sept. 11, insurers adjusted their rates to account for the risk of weather-related catastrophes such as hurricanes, but not for man-made ones,” said Baranoff. “Previously, Hurricane Andrew in 1992 was the largest loss ever, with $22.9 billion in adjusted losses.  Estimates of private insurance losses from Sept. 11 have run from $30 billion to over $90 billion.” 

In her book, Baranoff explains how the worldwide insurance industry was already in the grips of a slowdown, with profitability down, losses up and premiums rising. The man-made catastrophes of Sept. 11 intensified the slowdown dramatically and raised major terrorism-coverage issues. 

In addition to the Sept. 11 attacks, the failure of Enron and the problems with mold in Texas contributed to major losses in 2001, the most difficult year for the insurance industry in memory. “The immediate results were rate hikes in every line of insurance, lower coverage limits, elimination of terrorism coverage and lack of availability of reinsurers, who insure insurance companies against large losses,” said Baranoff. Reinsurers experienced their greatest losses ever. Swiss Re, the world’s second largest reinsurer, posted a $99 million loss for 2001, the company’s first loss since 1868. And Lloyd’s of London, a major reinsurer, posted a $4.53 billion loss, largely as a result of claims from the Sept. 11 attacks.

The exclusion of terrorism coverage in policies that previously covered such risk prompted President George W. Bush to sign the Terrorism Risk Insurance Act on Nov. 26, 2002, which provides affordable coverage for catastrophic financial losses from potential terrorist attacks. 

“The insurance industry was radically transformed on Sept. 11, 2001,” said Daniel Gattis, managing director of Paradigm Partners International – an insurance consulting firm – and a former executive in KPMG’s insurance consulting unit. As Professor Baranoff’s book points out, said Gattis, “risk managers no longer can simply assume the industry patterns of the last eight decades. They must understand and integrate the fundamental shifts in societal expectations, contracts, and risk assessment that describe and define this new world.”