How 9/11 changed the insurance sector

When the World Trade Center fell on 11 September 2001, more than 530 employees and consultants from Marsh McLennan and Aon were based in the Twin Towers.

Their colleagues spent the following days managing an unprecedented wave of claims and disruption to their own operations, without knowing who among their friends and colleagues had survived.

The attacks produced the largest insured loss the insurance industry had faced to that point, about $59 billion in 2024 dollars, spread across nearly every line of insurance simultaneously. The lasting significance of 9/11, however, is not really about the size of the loss, even though only two single-event catastrophes (Hurricanes Katrina and Ian) have since matched it. It is that the attacks revealed the limits of what private insurance can cover and what happens once those limits are reached.

A new scale of risk

It was not the first time the industry had run into that wall. Nine years earlier, Hurricane Andrew had already exposed how badly insurers were underestimating correlated catastrophic losses, driving several insurers into insolvency and giving rise to modern catastrophe modelling and the catastrophe bond market. The two events were very different, but highlighted the same problem: what happens when a risk does not behave in a way the insurance sector is designed to handle?

Insurance theory identifies a set of conditions for judging whether a risk is insurable: is the occurrence of loss reasonably random and independent, is the maximum possible loss calculable and is there enough data to price it with confidence? Terrorism challenges several of these at once. Unlike conventional insured events it is a deliberate act intended to cause physical and psychological harm. Since an attack is designed to concentrate harm, the risk is also not independent, which undermines the logic of risk pooling.

The attacks on the World Trade Center, the Pentagon and Flight 93 generated losses across property, life, aviation, business interruption, liability and workers’ compensation - all from one event. Insurers had little relevant historical data from which to estimate the frequency and severity of such losses.

Terrorism imposes indirect but significant costs for national security, economic continuity and financial stability. 9/11 showed that private risk and insurance markets reach their limits with risks like this, not because the whole industry cannot afford to pay but because so much of the loss can land on one insurer at once.

Losses that cluster like this are hard to spread out, which sits uneasily with the risk appetite and regulatory requirements of the insurance industry. In practice, governments became providers of additional risk-bearing capacity where private markets were unable or unwilling to hold the exposure alone. Consequently, governments and insurers developed arrangements combining private capital, underwriting and risk modelling with public risk-bearing capacity.

These include the US Terrorism Risk Insurance Act of 2002, the UK’s expanded Pool Re, France’s GAREAT (2001) and Germany’s Extremus (2002). These arrangements have since informed debates about how other systemic risks, such as cyber, pandemic and climate-related risks, might be shared between private insurance markets and the state.

9/11 also triggered a practical change. Years of litigation followed over whether the two aircraft strikes on the World Trade Center counted as one insured occurrence or two, as the final policy wording for the towers had not been finalised and agreed. The dispute accelerated the London Market’s move away from its habit of agreeing cover informally first and finalising the wording later. The market moved towards embedding contract certainty with agreed wording in place before cover begins.

9/11 was not only a crisis from an insurability point of view. The insurance sector was also one of its victims in the most direct sense. In the years after, the September 11th Insurance Trust was created to honour the memory of the colleagues who lost their lives and to fund insurance scholarships on both sides of the Atlantic, including at St. John’s University in New York and Bayes Business School, then Cass, in London.

Twenty-five years on, 9/11 is still a reminder of how little certainty the world offers, and of what it takes in partnerships, systems and people, to keep it insurable.