Blunting the Impact of a Changing Terrorist Risk
For businesses trying to protect against terror risk, insurance can be a key line of defense. This matters because insurance can play a vital role in protecting businesses and taxpayers from terror’s economic impact and in boosting society’s resilience against terror attack. As the risk of terrorism evolves, insurance is struggling to keep up.
The risk of large-scale terrorist attacks remains in check, especially in the United States, but its impact on societies is disproportionate to any actual loss. A 2015 Gallup poll revealed that terrorism is the most important U.S. problem for one in six Americans. In that same year, approximately 13,500 Americans died from gun violence, while terrorist attacks on U.S. soil in the last decade took 71 lives.
In that regard, terrorism is succeeding at one of its key goals: spreading fear, whether rational or not. While insurance is the art of defining risks and potential loss and (generally physical) losses, terrorism aims to create an emotional or mental ripple effect of uncertainty that reaches far beyond its physical impact. So, insurance will never fully mitigate the impact of terrorism; it can, however, help society return to economic or financial normalcy as quickly as possible after an attack, but only if it can cover the “definable” losses from terror, which is now the challenge at hand.
An Evolving Peril
After the 9/11 attacks, the U.S. was one of several countries that established market pools against terror. Modeled largely on natural catastrophe pools, they focused primarily on protecting the economy against large-scale property damage. The U.S.’s market pool, now called TRIPRA, was renewed in 2015. All the major Western economies now have a market pool to mitigate terrorism risk.
The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in the U.S. requires commercial insurers to make terrorism coverage available and provides a federal backstop to insurer losses. It has been credited for doubling take-up rates for commercial property terrorism insurance coverage to above 60 percent, and prices for terrorism insurance have dropped over the years.
Insurance can’t fully mitigate the impact of terrorism. It can help society return to economic/financial normalcy.
The likelihood of catastrophic terror events like 9/11 has become more remote in recent years, thanks to official work in gathering intelligence and infiltrating terror networks; however, groups such as ISIS have cultivated and encouraged “lone wolf” terrorism—attacks using guns, knives or even vehicles—that have caused significant loss of life and long-term disruption, but not yet major property losses. In 2015, Swiss Re’s sigma report calculated that 27 terrorist events resulted in 1,082 fatalities, but no insured losses. Not to diminish the significant loss of human life, it should be noted that terror events in Western countries in recent years, such as the 2013 Boston Marathon bombing and the Charlie Hebdo and Bataclan attacks in Paris, did not materially impact the terrorism pools due to their distinct absence of significant physical damage. They did impact the businesses and local economies within the affected cities.
The true financial and economic impact of these attacks isn’t being captured through traditional insurance products. For instance, insurance won’t cover nearby businesses that weren’t physically damaged, but suffer from a downturn in the retail or tourism sector in the aftermath of an attack.
Nor does insurance typically take into account the increasingly interconnected and service-driven nature of our global economy. If a terror attack closes the ports in the Netherlands, what happens to the florist who has his flowers shipped from that port? Contingent business interruption insurance might cover such a loss, but it tends to be priced out of the reach of the small and medium businesses that are most vulnerable to the economic aftermath of an attack. (In the wake of 9/11, about 18,500 small businesses were dislocated, disrupted or discontinued.)
As companies and economies become increasingly interdependent, the non-damage causes of business interruption are playing a larger role: think cyber attacks, strikes, power outages and pandemics. Over the last 35 years, the gap between insured and uninsured losses has been increasing, due to the increasing interconnectivity and contingencies between various sectors of the world economy.
Economic interconnection is destined to increase even further; consider the Internet of Things and the growing number of businesses that are becoming reliant on the sharing of data. Where are the bounds of insurability in such an economy? What are the responsibilities of businesses, private citizens, market pools, governments and insurers?
While the (re)insurance industry is working to quantify risks and refine insurance pricing models, protecting society will require the combined efforts of many stakeholders. A unified response to the terrorism threat will help to ensure societal resilience from attacks of all kinds.