More than one year after the mega-catastrophy, “Terrorism Insurance” has acquired the status of probably the most controversial insurance coverage ever. Not only has it emerged from the shadow of “political risks insurance” to be underwritten as stand-alone policy by many carriers, it has stirred the businesses across the globe and worried the risk managers in trying to keep their enterprises properly protected. It is today the most sought after insurance coverage by small and big businesses alike, but not all are lucky to get one.

A new term ‘macroterrorism’ has been coined after 9/11 to describe an act of terrorism that causes more than $1 billion in losses or 500 deaths. As a benchmark, this is about the insurance loss level caused by the most costly IRA bomb blast at Bishopsgate in London in April 1993. Macroterrorism has opened a new risk landscape. Latest Swiss Re estimates on 9/11 event point to a total loss of between $30 and $58 billion for all lines of business, out of which $12 billion bill is alone for property and casualty line insurers and reinsurers. Compared to this the previous largest catastrophic loss known to the insurance industry, i.e. Hurricane Andrew caused only $16 billion in insured losses in 1991.

Impact

Terrorism insurance was available globally as part of most of the commercial policies covering business establishments. For multinational establishments, it was available as part of their political risks insurance policy. Terrorism was a companion risk in the spectrum of other political risks like nationalisation, seizure, overthrow of the governments, etc. and it required only a casual glance by the underwriters writing for most of the territories. The pricing of terrorism cover was based on the market forces of demand and supply and the risk was looked at as part of the whole package. For larger risks however, careful selection of countries, political stability and site security were the underwriting factors before granting terrorism cover.

The WTC attack changed the whole scenario. In US, the terrorism cover was immediately and completely withdrawn (except in some states) by express exclusion to various commercial policies. World’s remaining insurance markets including Lloyds’ of London also responded in a similar fashion by putting exclusions to various policies. Cover could be granted in rare cases but the pricing was exorbitabt and prohibitive.

This led to the sagging morale of the industries and enterprises when banks and financial institutions refused to advance loans in the absence of a proper terrorism cover. Since the attack, $15.5 billion in real estate projects in 17 states have been stalled or canceled because of a scarcity of terrorism insurance in US alone, according to a September survey by the Real Estate Roundtable of USA.

State’s Intervention

The trend continued till the middle of 2002 when governments stepped in to initiate measures to bolster the availability of terrorism insurance and dilute its negative impact on the overall economy.

In UK, the government and the Association of British Insurers (ABI) announced the new arrangements for terrorism insurance by amending the provisions of Pool Re, an existing (since 1990s) government backed pool for terrorism risks. Pool Re initially covered terrorism losses from fire and explosion but under the new arrangements it will be possible to obtain cover against a wider range of perils including biological contamination and impact by aircraft. From 1 January 2003 nuclear contamination will be added.

The arrangements also include a cap on insurers' liability, after which the government will step in as insurer of last resort. From 1 January 2003 the maximum liability of individual insurers will be capped per terrorist event and per year. The level of the cap for each individual insurer will be based on its market share. The annual aggregate limits will be:

Effective Date	Cap per Event	Cap per annum
1 January 2003	£30 million	£60 million
1 January 2004	£50 million	£100 million
1 January 2005	£75 million	£150 million
1 January 2006	£100 million	£200 million

In US, the SENATE recently passed a bill to to shield the insurance industry from catastrophic costs of future terror onslaughts. The provisions of the bill are as under:

o The program would be triggered if a terrorist attack produced at least $5 billion in insured losses in the USA.

o Each insurance company would pay a deductible before federal assistance kicks in. The deductible would be a percentage of an insurer's annual premiums: 7% in 2003, 10% in 2004 and 15% in 2005. If a terrorist incident were to occur in 2004, a company with $1 billion in premiums would pay $100 million in insured losses before receiving federal aid.

o The federal government would pay 90% of losses in excess of the deductible, and the company would pay the remaining 10%.

o Losses covered by the federal government would be capped at $100 billion a year.

In the past too, various governments all over the world have been involved with Terrorism Insurance. In Israel, the government runs a mandatory insurance programme (PCTF) that pays for all the terrorist losses, funded by tax revenues. France has established a new pool for terrorism exposure, i.e. state backed GAREAT which began operating on January 1, 2002. Spain maintains a mandatory government run programme (Consorcio) financed by premiums based on property values. South Africa has SASRIA since 1979 which tackles terror insurance. In response to 9/11 attacks, many other countries including Canada, Germany and Australia are considering government backed solutions to insure against terrorist acts.

Availability and Pricing Issues

The political risk insurance market, particularly Lloyd's, is already offering stand-alone terrorism coverage. Lloyd's coverage is going for rates of between 1 percent and 5 percent of insured limits, for both domestic and foreign assets. The policies cover physical damage or business interruption caused by terrorist acts. AIG is also providing stand-alone terrorism coverage, but sold out of the insurer's property and casualty division.

Another way is to buy terror coverage as part of an overall political risk package. Political risk insurers already underwrite terrorism perils in that context, usually as a component of political-violence policies. Since 9/11, there has also been a 25 percent to 50 percent across-the-board premium rate increase for political risk insurance. Those policies also cover losses associated with sabotage, war, civil conflict, and revolutions. The only catch is that political risk insurance packages cover only overseas assets against terrorist attacks, leaving domestic assets uncovered. But this option is still good for those companies that are faced with multinational terror exposure.

A survey conducted by “Risk & Insurance” to find out the availibity of terrorism coverage in all industries found that only nine out of thousands of companies in US were providing first-party stand-alone coverage. Other companies were providing some level of coverage for terrorism either under third-party policies or within the specialty lines.

The table below illustrates the market, capacity and indicative premium level for the terrorism insurance currently available in insurance markets globally.

COMPANY	MARKET	PRODUCT & HIGHLIGHTS OF COVERAGE	CAPACITY	BASE PREMIUM
Ace USA, Philadelphia	US & Canadian commercial property	1st party stand-alone coverage, both admitted & non-admitted	$ 100 million	Exposure dependent
AIG, New York	Airline Industry	1^st party stand-alone coverage, aviation war risk, hijacking liability American International Companies, Property Terrorism Facility-worldwide, domestic & foreign property cover; property damage & BI cover; locations must be specifically named, policy period not to exceed 1 year.	$ 150 million in excess of $ 50 million in aggregate, up to $ 850 million in excess of $ 150 million; total of $ 1 billion per airline. $ 150 million per event and in aggregate (maximum any one insured).	NA $ 50,000 minimum
Allianz AG, Frankfurt, Germany	Airline Industry	3^rd party liability for airlines.	Up to $ 1 billion per aircraft and up to $ 2 billion per airline per year.	Calculated per passenger carried
Arch Capital, Bermuda	Multiple markets	Coverage on a selected basis – 1^st party property damage, excluding nuclear biochemical. Availability varies by territory.	Varies by zone.	Exposure dependent.
AXIS Specialty, Bermuda	Multiple markets	Terrorism as a 1^st party stand-alone; property, aviation, marine.	$ 100 million	Between 1–2 % online
Berkshire Hathaway	Multiple markets	1^st party property coverage; 3^rd party coverage available.	$ 500 million	Exposure dependent
Oil Insurance Ltd., Bermuda	Energy company cover (Oil Insurance Ltd.)	All Risks Physical Damage, Control of Well & 3^rd party Pollution Liability-open to all eligible energy companies.	$ 250 million per occurrence— no sublimit. $ 150 million $ 200 million	$ 250,000 per OIL rules with a $ 5 million deductible. $ 25,000 per OIL rules with a $ 50 million deductible. $ 375,000 for excess PD & $ 1.5 million for B1.
Lloyd’s of London	Multiple markets	1^st party physical damage or BI caused by terrorist acts.	$ 200 million	1-5 % of insured limits.
SRIR Luxembourg (Zurich Financial Services, XL Capital Ltd., Swiss Re, Hannover Re, SCOR, Allianz)	Property Coverage	Physical loss or damages to insured properties – directly resulting from an act of terrorism. European risks only.	EUR 500 million	NA

Source: Risk & Insurance

Special partnerships have also begun to spring up to address terrorism coverage shortages as well. Special Risk Insurance and Reinsurance, Luxembourg (SRIR) has been created with the partnership of XL Capital Ltd., Swiss Re, SCOR, Hannover Re, and Allianz. SRIR has reported a total committed capital of EUR 500 million. But policies will only cover damage to property directly from an act of terrorism and will only be focused on Europe. Business interruption and liability losses will not be insured.

Risk Modelling: Insurability Factor

Many in the industry believe that terrorism risk is not insurable because it cannot be quantified. Modeling companies and insurers, however, are beginning to develop new risk simulation tools for analyzing the risk and bringing clarity to the process of underwriting the terrorism risk.

Risk simulation requires various possibilities and their attributes to be captured within a model which will generate a large number of alternative outcomes of terrorist activities. Each simulated outcome is produced by sampling from probability distribution for the attack time using different weapons, the attack multiplicity, the choice of targets, the effectiveness of counter-terrorism intelligence, the security systems, weapon reliability and the loss for each weapon-target combination.

A new model, i.e. “The RMS Terrorism Risk Model” has already been developed to estimate the probability and cost of property damage, business interruption and casualities caused by 16 different modes of terrorist attacks including conventional explosives and weapons, and chemical, biological, radiological and nuclear scenarios. For each attack mode, the model offers high resolution simulations of all the principal agents of damage and loss, including blast pressure, airborne and ground based contaminants and the impact of exclusion zones.

Crisis Management

It is back to basics as the WTC attack has brought the focus back on crisis management and having a proper disaster recovery plan. According to a Marsh study, for every dollar spent on developing crisis management plans, $7 is saved in losses. Companies who didn’t take the concept seriously perished without a trace but the ones who practised it, came out with flying colours after the WTC crisis.

We have a livewire example in “Morgan Stanley” who occupied the 44^th through 74^th floors of the WTC-2 with its 2700 employees and had another 1000 employees across Austin Tobin Plaza at 5 WTC. Morgan Stanley was the largest employer at site and and had the highest risk exposure. The second aircraft crashed directly into upper floor occupies by Morgan Stanley but all the staff had been evacuated by then. The next morning the securities firm released a well researched analysis of the financial impact of the WTC acctack on the insurance industry. The company had a nicely drawn and well rehearsed crisis management plan and therefore were back in business in no time as if nothing had happened.

Predictions and conclusion

Putting a price tag on a terror attack is extraordinarily difficult. Natural disasters such as floods or hurricanes are more predictable than the intentions and acts of terrorists. Nevertheless, the market seems to have recovered from the initial shock and trauma. Reluctance and withdrawl symptoms have given way to cautious underwriting and an increased number of insurers and reinsurers are now attempting to provide a solution to the coverage crisis. Unlike early 2001, terrorism insurance is now clearly available and a cover of even $1 billion per location is not far-fetched.

Market is set to grow further as catastropic bond market is evincing interest in macroterrorism risks. Other Alternative Risk Techniques like securitization should follow suit. This is no surprise as risk modelling and simulation techniques on terrorism is further being strengthened by dedicated researches. Coverage is likely to further get broadened with business interruption getting its due share and the pricing becoming logical, affordable and reasonable.

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Terrorism Insurance: Coming out of Shadows An Analysis of Coverage and Pricing Issues in Terrorism and Political Risks Insurance

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Terrorism Insurance: Coming out of Shadows
An Analysis of Coverage and Pricing Issues in Terrorism and Political Risks Insurance