Fresh terrorist disaster 'could bankrupt insurance giants'

Some insurance giants would go bankrupt if the world suffered a repeat of the attacks of 11 September, a global think tank warned yesterday.

The consequences of the assaults on New York and Washington could inflict major damage on the world economy despite the initial strong recovery, the Organisation for Economic Co-operation and Development said.

It said rises in insurance costs, larger government spending on defence and barriers to international trade could all put the brakes on growth.

It did not put a figure on the potential impact but said trade volumes alone could fall by 3 per cent because of higher shipping and insurance costs.

In its assessment, the OECD said: "Even though the short-term recovery from the terrorist attacks has been faster than expected, negative medium-term consequences through various indirect channels cannot be excluded."

It highlighted the impact on the insurance industry as one of the most serious impacts. It said that despite losses estimated at between $30bn and $58bn as a result of the attacks, no major bankruptcy had occurred.

"Nevertheless, the capital base of many insurance firms has been hit, and it is likely that several companies would not be in a position to withstand another shock of similar magnitude," it said.

The OECD said the rises in insurance premiums of as much as 30 per cent had already hurt the aviation industry as well as the transport, construction, tourism and energy sectors.

It also warned that the economy would be hurt if insurance companies pulled out of covering certain industries. "To the extent that it increases uncertainty related to investment decisions, reduced insurance coverage may thus have a negative impact on growth."

It said one lasting impact was the rise in defence spending in several countries since the attacks, which has reversed part of the post-Cold War period "peace dividend".

Although increased military and security spending gave a short-term boost to the economy, it created a longer-term risk of crowding out activity in other sectors, the OECD said.

There was a further risk of economic damage from an impact on the costs and efficiency of international trade.

Customs and port procedures had already become more time-consuming while airfreight costs had also risen, it said. Pressure is growing to tighten surveillance of goods, as well as migrants, at borders, the survey added. Costs in other sectors may also rise as companies invest in increased security and to ensure back-up capacity of core functions.

"Even a relatively small increase in the cost of trading internationally in the order of 1 per cent would lead to a drop in trade flows of between 2 and 3 per cent," the OECD said.