Ten days after three hijacked aeroplanes crashed into the World Trade Centre and the Pentagon, the insurance industry is struggling to produce assessments of the financial cost of the devastating loss of life and destruction that the attacks caused.
Munich Re and Swiss Re, the largest reinsurers in the world, yesterday rushed out updated estimates of liabilities, which more than doubled initial expectations to $3.25bn (£2.22bn).
Insurers are clear about one thing: the attacks will transform their industry globally, changing the role insurance plays for companies and individuals.
The industry collectively is expected to absorb the burgeoning and complex variety of insurance claims stemming from the disaster. Although the size of the catastrophe will crush some weaker players, in general, the industry appears well-reserved enough to cope.
However, despite all its supposedly sophisticated checks and balances, not in its worst nightmares did the industry expect such a devastating hit. Industry leaders are now questioning some of the insurance world's fundamental principles and practices.
One analyst said: "The insurance industry has become a lot more sophisticated over the past 10 years, but this crisis has made it clear that however complex your catastrophe modelling, it doesn't help you when disaster really strikes. Once the claims have finally been settled, underwriters will sit down and ask themselves: "How do we now write new business?"
The most obvious change will be to the cost of insurance. Within hours of the first plane crashing into the World Trade Centre, insurers that cover terrorism and war risks had cancelled existing policies and are now reported to be introducing rates as high as 400 per cent above their previous level.
This will affect airlines most heavily but property cover will also rise.
The effect on war insurance prices has been immediate because such contracts can be cancelled with seven days' notice. But price increases will be felt in almost every other type of insurance in January, when yearly rates are revised, in an effort to rebuild reserves and financial strength.
Christian Dinesen, a director of Standard & Poor's, the credit rating agency, said: "Standard & Poor's would expect to see an average price increase of 16 per cent just to remove our negative outlook on the reinsurance industry. We could expect this now to be significantly higher."
Buying cover against terrorism and war will also become more complex. In America, the threat of war is at present insured separately, but terrorism is covered under standard aviation and property insurance as an almost free add-on to the policy. In future, US companies will be forced to buy insurance against terrorism separately.
One senior insurance broker said: "Terrorism cover will become a very specialist area and as it becomes more specialised, it becomes more expensive. And of course that leaves the door open for companies not to insure against the risk of a terrorist attack."
A similar change happened in London after a bomb devastated the Baltic Exchange in the City in 1992. After this terrorist attack, underwriters started excluding terrorism from aviation and property cover, creating the risk that the area might become uninsurable.
Alarmed by this possibility, the Government set up Pool Re, a specialist terrorism reinsurer.
Other expensive black holes are emerging in existing policies. One involves aviation insurance, which will be claimed to help pay for the devastation to the World Trade Centre and surrounding buildings.
Coincidentally, the possibility of a plane crash in Manhattan is one of the catastrophes insurers use to calculate extreme-loss scenarios. But the two aeroplanes that ploughed into the twin towers had only $1.5bn of this third-party liability cover each.
One specialist aviation broker said: "The cover will be blown through several times over. It looks like you simply won't be able to buy aviation insurance with third-party liability cover any more."
What will replace it is unclear, but many expect the American administration to intervene in areas that the market does not want to touch in the future.
Many aspects of last week's disaster are expected to end up as mammoth legal battles in the US courts.
Topping the list could be the common American practice of launching massive class-action lawsuits, in this case against airlines and airports for victims in the trauma.
Other lawsuits are expected from those who witnessed the horrific attacks unfold, as well as from those who risk developing asbestosis, a chronic lung disease, from breathing in debris that includes asbestos, a toxic material that has been used to insulate buildings.
Many believe that the risks of these class actions, which would cripple some insurers, will force the American administration to block this potential litigation.
Americans are used to suing for hypothetical damage and insurers have already paid out hundreds of millions of dollars to cover liabilities over asbestosis and smoking-related illnesses. A change in the law could mark a relaxation in insurers' liabilities in a range of areas.
Yet the respite would be limited because most companies will be faced with the daunting challenge of spreading their own risks.
One possibility is that the use of the increasingly global reinsurance companies may decline and insurers may instead try to offload their liabilities by securitising them via catastrophe bonds in the capital markets.
Mr Dinesen, of Standard & Poor's, said the capital markets have not been used as extensively because reinsurers have been cheaper.
"But if that changes in the light of last week, the capital markets may look a lot more attractive," he said.
Another possibility is that if the cost of reinsurance rises, insurers may try to keep more of the risk in house and not pass it on to reinsurers. This would reinforce the trend towards ever-larger global insurers, which are able to underwrite very substantial risks.
The most pervading shift may be in the way the historic insurance is conducted. In Lloyd's of London and Continental Europe especially, relationships between brokers, insurers and reinsurers are informal and old-fashioned.
The tightening of belts will cause all parties to become more ruthless, Mr Dinesen said.
"Both sides will become a lot more opportunistic as the cost of risk transfer from insurers to reinsurers will become more expensive and possibly more short term," he said.Reuse content