Terrorism risk wasn't much of an insurance topic in the industry prior to September 11, 2001. The events of that day changed us all, and our viewpoint on insurance terror risks.
In the immediate wake of 9/11 – and faced with financial losses of between $30 and $40 billion – one of the insurance industry’s most pressing concerns was the issue of limited capacity, writes John Cogliano for the Insurance Journal.
Cogliano is in charge of property terrorism coverage at Lexington Insurance Co., which was one of the few carriers able to extend stand-alone terrorism coverage at that time.
The passing of the Terrorism Risk Insurance Act of 2002, along with its two extensions, served to effectively increase market capacity, Cogliano says. Over the past several years, there has been a significant increase in capacity in the stand-alone market with the current penetration of terrorism insurance hovering around 60 percent.
Underwriting terrorism risks was an impossible task prior to 2001 because there was little historical data to use as a baseline for underwriting the coverage. Unlike in underwriting hurricane or even earthquake risks, for example, where there is adequate or even abundant (in the case of hurricanes) historical data on which to base cost modeling.
Cogliano says that in the past 10 years, however, the industry has developed stronger modeling to help build effective terrorism risk underwriting tools. Additionally, insurers are forging relationships with partners such as the Stimson Center and the Rand Institute to assist in creating better loss scenarios and practical ways of lessening terrorism exposures. As a result, insurers have introduced higher limits and wider coverages to include biological, chemical, and cyber terrorism threats – coverages that weren’t even a consideration just a few years ago.
Building Solutions to Terrorism Risk
Terrorism risk has also changed how insurers act as underwriters and business partners to their insureds and brokers. As businesses seek ways to build their own security measures, insurers must understand the very specific exposures that terrorism presents. As we have seen, an office building in a major city has different vulnerabilities than a convention center in a resort town like Orlando. Part of understanding terrorism risk is addressing the very specific nature of these exposures. Facilities such as dams and power plants in the heartland may be just as attractive to terrorists as high value targets in urban centers, and therefore private sector facilities may become increasingly vulnerable as government assets have become better protected.
One avebue for businesses to reduce insurance costs is to have a comprehenisve terrorism plan that can include safety planning in the event a terror act occurs and fortifying structures with bomb-proof glass, as an example. Entranceways or vulnerable building areas are being protected, staff is being trained, building construction is being examined – all with a new appreciation of security with an eye on terrorism.
In addition, the insurance sector has been aided by the nation's spending of approximately $100 billion annually on counter-terrorism efforts. It is hoped of course that these efforts have been successful in thwarting another mass casualty attack in the U.S. Since 9/11, there have been approximately 39 averted terrorism attempts on the United States, saving counteless lives and billions in losses.
Conclusion
The insurance industry's focus on terror risk management has helped tremendously, but the entire public must remain vigilant. While many terror acts have been averted, it takes just one failure of vigilance and security to dash our collective safety and devastate our nation and industry with untold catastrophic losses of life and property. Our lives and our industry have changed since 9/11 and we must never drop our guard or rest on our perceived security.
