Terrorism Risk


It’s Election Day and as you head to the polls the insurance issue that remains at the top of mind for most is the future of the Terrorism Risk Insurance Act (TRIA).

In a new paper the Insurance Information Institute (I.I.I.) says the question of what happens if the federal act is not renewed by Congress is no longer a theoretical one:

Since insurance policies negotiated during 2014 extend beyond the imminent December 31 expiration date of the program, the negative consequences of non-renewal are already being experienced by businesses across America and their insurers.”

The private sector simply does not have the capacity to provide insurance or reinsurance for terrorism risk to the extent currently provided by the federal program, the I.I.I. says. As a result, in the absence of the act, terrorism risk insurance would be less available and less affordable.

Over at WGA InsureBlog, David Bardelli, senior vice president and casualty practice leader for William Gallagher Associates, notes that with Congress not back in session until mid-November, the clock is ticking for lawmakers to come up with a solution before the end of the year.

Bardelli writes:

A lame duck Congressional session could pass an extension, which has been the case with previous versions of the bill. With House Democrats and Republicans at odds over the latest version of the House Committee’s proposal, it looks like the November elections will have the biggest impact on what happens with TRIA.”

Insurers are not alone in their concerns over the future of terrorism risk insurance. Just on Friday, the Real Estate Roundtable reported that while senior commercial real estate executives see a continuing recovery in the markets, they remain concerned about the lack of clear direction in many federal policies, primarily terrorism risk insurance.

Roundtable President and CEO Jeffrey D. DeBoer, said:

Without a long-term reauthorization of TRIA when policymakers return in November, financing for CRE projects will be directly threatened, job creation will suffer as it did after 9-11, and businesses can expect a general slowdown as many financing contracts will be found to be in technical default without terrorism insurance.”

Congress will return November 12 for the “lame duck” session.

Global fatalities from acts of terrorism jumped by 30 percent in the last year even as the number of attacks decreased, according to a new interactive mapping platform from risk analytics firm Maplecroft.

Some 18,668 terrorism fatalities were recorded in the 12 months prior to July 1, up 29.3 percent from an annual average of 14,433 for the previous five years.

Over the same period there were some 9,471 global terrorism attacks at an average of 26 a day, down from a five-year average of 10,468. This indicates that terrorist methods have become increasingly deadly over the last year, Maplecroft said.

Nigeria recorded by far the highest number of fatalities per attack, with 146 reported attacks in the last year resulting in 3,477 fatalities – an average of 24 fatalities per attack (compared to 2 fatalities per attack in Iraq).

Iraq recorded the highest number of attacks, with 3,158 acts of terrorism resulting in 5,929 fatalities.

China, Egypt, Kenya and Libya are seeing the most significant increases in the risks of terrorist attacks, the Maplecroft Terrorism and Security Dashboard (MTSD) reveals.

The MTSD classifies 12 countries as ‘extreme risk,’ including: Iraq (most at risk), Afghanistan (2nd), Pakistan (3rd), Somalia (4th), Yemen (6th), Syria (7th), Lebanon (9th) and Libya (10th). Many of these countries are blighted by high levels of instability and weak governance, Maplecroft notes.

However, of particular concern for investors, the important growth economies of Nigeria (5th), the Philippines (8th), Colombia (11th) and Kenya (12th) also feature in the category.

Jordan Perry, a principal political risk analyst at Maplecroft says:

Libya, Kenya and Egypt are among a handful of countries to witness a significant increase in risk in the MTSD and investor confidence in key sectors, including tourism and oil and gas, has been hurt. When faced with rising security costs and decreasing safety for their personnel, companies can, and do, reconsider their country-level commitments.”

The MTSD logs, analyzes and plots all reported incidents of terrorism, piracy, political violence and human rights abuses by security forces down to 100m² worldwide. It also draws on Maplecroft’s seven years of global data to reveal terrorism and security trends across 197 countries.

Maplecroft CEO Alyson Warhurst makes the important point that the dynamic nature of terrorism means individual events are impossible to predict, but the information included in the MTSD can help organizations make informed decisions relating to market entry, security measures for in-country operations, duty of care obligations, supply chain continuity and risk pricing.

Check out I.I.I. facts and stats on terrorism risk.

Allowing the terrorism risk insurance program to expire could increase federal spending by billions of dollars in the event of a future terrorist attack, according to a new study by RAND Corporation.

RAND reports that for terrorist attacks with losses up to about $50 billion, not having the Terrorism Risk Insurance Act (TRIA) in place would result in higher federal spending.

For terrorist attacks with losses ranging from $14 billion to $26 billion, RAND predicts the federal government would spend $1.5 billion to $7 billion more without TRIA than with the program in place.

The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.

RAND’s analysis comes as a bipartisan agreement was introduced in the Senate last week that would extend TRIA for seven years, with changes in the insurer co-pay and mandatory recoupment threshold.

An excerpt from the RAND report reads:

If allowing TRIA to expire causes terrorism insurance coverage to revert to pre-TRIA levels, a greater fraction of loss in a terrorist attack would go uninsured than would be the case with TRIA in place. More loss going uninsured would increase demand for other forms of compensation, which could, in turn, lead to an increase in other (non-TRIA) forms of federal disaster assistance.”

The study makes the point that the federal government currently makes no net expenditures under TRIA until the commercial insurance industry has paid at least $27.5 billion in claims in TRIA-eligible lines.

As the size of the attack increases and the insured loss increases beyond the $27.5 billion industry retention amount, the federal liability through TRIA kicks in.

Based on current take-up rates, a 9/11 type attack would result in an insured loss of about $33 billion, RAND notes. Therefore, taxpayers would contribute through TRIA only in an attack comparable in magnitude to 9/11, which remains the second most costly insurance event in U.S. history, exceeded only by Hurricane Katrina.

For attacks with greater losses, in excess of $50 billion, the increase in disaster assistance after an attack without TRIA begins to be countered by the elimination of federal payments through the TRIA program, eventually leading to a net decrease in federal spending should TRIA expire.

RAND concludes:

From the perspective of federal spending, TRIA therefore appears to be a reasonable federal policy: In the absence of a terrorist attack, it costs taxpayers relatively little, and in the event of a terrorist attack comparable to any experienced before, it is expected to save taxpayers money.”

Claims Journal reports on the study findings here.

The Terrorism Risk Insurance Program, a public/private risk-sharing partnership which is set to expire at the end of 2014, is absolutely critical to maintaining the health of the American economy, according to an updated white paper just released by the Insurance Information Institute (I.I.I.).

The I.I.I.’s Terrorism Risk: A Constant Threat, Impacts for Property/Casualty Insurers explains that should the federal Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) be allowed to expire at year-end 2014, this would have a detrimental impact on the availability and affordability of terrorism insurance for businesses.

Introducing the paper, Dr. Robert Hartwig, I.I.I. president and an economist says:

The war on terror is far from over, as last year’s Boston Marathon bombings and other events around the world attest, but TRIA by all objective measures is now a proven and unqualified success. The program not only succeeded in restoring stability to the country’s vital insurance and reinsurance markets in the years immediately following 9/11, but it continues more than a decade later to deliver substantive, direct benefits to millions of businesses, workers, consumers and the overall economy—all at essentially no cost to taxpayers.”

Industry data shows that the proportion of businesses buying property terrorism insurance (the take-up rate for terrorism coverage) has increased since the enactment of TRIA in 2002. In fact for the last five years, some 60 percent of businesses nationally have purchased terrorism coverage, usually at a reasonable cost.

Dr. Hartwig notes that industries responsible for much of the country’s critical infrastructure such as power and utilities, telecommunications and health care, along with financial institutions and local government have take-up rates that approach or exceed 70 percent.

Moreover, the take-up rate for workers compensation is effectively 100 percent, meaning that every worker in America is protected against injuries suffered as the result of a terrorist attack, he adds.

Direct foreign investors operating in the Middle East and North Africa (MENA) face an increasing level of political risk as a result of the instability and uncertainty created by the Arab Awakening, according to an annual risk report.

The 2014 Marsh-Maplecroft Political Risk Map reveals that more than 60 percent of countries in the MENA region have experienced a significant increase in the level of political violence since 2010.

According to the map, 17 countries since 2010 have experienced a significant increase in their level of dynamic political risk, more than half of which are located in the MENA region.

Note: dynamic political risks focus on short-term challenges, such as rule of law, political violence, the macroeconomic environment, resource nationalism and regime stability.

Syria has seen the most significant increase in risk and is now ranked as the second-highest risk country behind only Somalia.  For the first time, Egypt is now categorized as “extreme” risk for political violence, a deterioration driven by post-coup violence and increased terrorist activity in the Sinai Peninsula.

Over the past year, East Africa was host to the most countries with an increase in political violence, according to the map.

Marsh notes that the increase in political violence in East Africa presents significant challenges to foreign investors looking to the region following the discovery of substantial oil and gas reserves.

Despite these risks, the map points to opportunities for investors in six growth markets where overall dynamic political risk has significantly improved since 2010: the Philippines, India, Uganda, Ghana, Israel, and Malaysia.

The map draws from Maplecroft’s Political Risk Atlas 2014 and highlights dynamic political risks across 197 countries, including conflict, terrorism, macroeconomic stability, rule of law, and regulatory and business environments.

Hat tip to Business Insurance which reports here.

More than a decade since 9/11, the Terrorism Risk Insurance Program continues to deliver “substantive direct benefits to millions of businesses, workers, consumers and the overall economy – all at essentially no cost to taxpayers.”

This was a key takeaway from testimony delivered yesterday by Dr. Robert Hartwig, I.I.I. president and chief economist, at a Senate Banking Committee hearing.

Dr. Hartwig noted:

The war on terror is far from over, as the recent Boston Marathon bombings attest, but TRIA by all objective measures is now a proven and unqualified success.”

Dr. Hartwig pointed out that upwards of 60 percent of businesses purchased terrorism coverage nationally in 2012, up from 27 percent in 2003.

Industries responsible for much of the country’s critical infrastructure such as power and utilities, telecommunications and healthcare, along with financial institutions and local government have take-up rates that approach or exceed 70 percent, Dr. Hartwig said.

Moreover, the take-up rate for workers compensation is effectively 100 percent, meaning that every worker in America is protected against injuries suffered as the result of a terrorist attack.

But it is important to note that the majority of coverage that exists in the market today exists because of the continued existence of the Terrorism Risk Insurance Program, Dr. Hartwig said.

He went on to warn of dire economic consequences if TRIA is not renewed:

A sharp spike in business failures, higher unemployment and reduced GDP growth are just a few of the adverse consequences that are certain to follow in the event of a major terrorist attack in the absence of TRIA.”

Dr. Hartwig noted that the unambiguous success of TRIA demonstrates that the Act has become an invaluable component of the country’s national security infrastructure, adding:

Failure to institutionalize a permanent plan to protect the nation’s financial infrastructure leaves the country unnecessarily vulnerable to economic instability and risk of recession.”

Also check out a recently updated I.I.I. paper on terrorism risk.

PC360 has more on this story.

Ratings agency Fitch has warned that failure to renew the federally backed Terrorism Risk Insurance Program could have a significant impact on the availability and pricing of workers compensation and commercial property insurance coverage.

Insurer credit ratings and the commercial mortgage backed securities (CMBS) market would also be affected.

The report comes as at least 19 U.S. embassies and consulates in the Middle East and North Africa remain closed through the week after the State Department issued a global travel alert to U.S. citizens due to potential terrorist threats.

Fitch notes that workers compensation insurers could be particularly vulnerable to large losses if an extreme terrorist event takes place without the federal terrorism reinsurance program in place:

Recognition of this vulnerability may lead to a withdrawal of insurer’s underwriting capacity from the workers’ compensation market, particularly in industries and geographic areas with greater perceived risk of terrorism-related losses. Reduced workers’ compensation coverage availability would generate broader economic consequences for employers.”

Another major line of business that is highly sensitive to changes in the terrorism risk insurance program is commercial property insurance.

Fitch says withdrawal of the federal backstop without readily available substitute coverage would likely move commercial property insurers to exclude terrorism from property coverage.

Fitch notes that demand for private market terrorism insurance protection will inevitably increase and premium rates will significantly rise if the terrorism risk insurance program is not extended beyond its December 31, 2014 expiration, or coverage is materially reduced.

The private market is unlikely to duplicate the coverage limits available under the current federal program if renewal is unsuccessful, Fitch says.

PC360 has more on this story.

Check out the newly updated Insurance Information Institute (I.I.I.) paper Terrorism Risk: A Constant Threat.

A continued threat of a terrorist attack or political violence exists in 44 percent of countries, according to Aon’s 2013 Terrorism and Political Violence Map.

Aon says this trend is especially prevalent in African and the Northern African countries, with the worst affected being Afghanistan, India, Iraq, Nigeria, Pakistan, Russia, Somalia, Syria, Thailand and the Yemen.

The Middle East and North Africa region saw the highest proportion of countries with a terrorism and sabotage peril, at 85 percent.

Despite 19 countries showing improved terrorism and political violence ratings, including the United Kingdom and Germany, Aon’s analysis suggests growing awareness is needed for businesses looking to expand.

A press release cites Neil Henderson, head of Aon Risk Solutions’ Crisis Management Terrorism team:

Terrorism is having an increasing impact on today’s global organizations and terrorist attacks are now regarded as a foreseeable risk. An attack not only on, but near an organization’s premises can result in human casualties, property damage, business interruption, legal liability issues and long term damage to brand and reputation.”

The map measures political violence and terrorism in 200 countries and territories to help companies assess the risk levels of exchange transfer, political violence and terrorism.

Check out I.I.I. facts and statistics on terrorism risk.

While insured property losses from the Boston Marathon bombing are small, the insurance of sports events is likely to be impacted, according to catastrophe modeling firm RMS.

Dr. Gordon Woo, catastrophist at RMS noted that the shortage of terrorism insurance cover in the years after 9/11 had led to the securitization of the cancellation risk of the 2006 FIFA World Cup.

So while the property insurance loss is small, the Boston Marathon bombing may well have a significant influence on the terrorism insurance market.”

Dr. Woo’s comments came as investigators moved closer to identifying possible suspects in Monday’s bombing which left 3 dead and more than 170 injured.

RMS says most of the property damage appears to be within 10-20 feet of the explosions, and insured property losses are unlikely to exceed $1 million. However, it believes the costs of business interruption as a result of security restrictions made after the event may be a larger source of insurance claims.

The Boston marathon attack was the first high-profile successful act of terror in the U.S. since 9/11, but it should be seen as one of the dozens of terrorist plots launched against the U.S. homeland since then.”

RMS noted that the use of smaller sized lethal explosive devices has been the preferred attack mode in recent terrorist plots. Street events, like the marathon, are inherently vulnerable because while they are very large crowds public access is unrestricted.

Dr. Woo added that plots involving a small number of operatives, such as seems to be the case in the Boston bombing, are the most difficult to prevent:

Terrorism attacks remain a very real threat; there have not been larger attacks only because of the success of plot interception.”

Global Reinsurance has more on this story.

Check out I.I.I. facts and stats on terrorism risk.

The scale and damage caused by recent global unrest has prompted a reassessment among risk carriers of how terrorism related risks and coverages are defined, according to a just-released report by Guy Carpenter.

Major terrorist attacks have occurred in Indonesia, Madrid, London and India since 2001, and the emergence of strong and independent al-Qaeda affiliate groups in unstable regions of the world now poses a significant threat to Western interests.

Guy Carpenter’s analysis finds that in addition to a now diverse and dispersed terrorism threat, there has been a dramatic rise in political instability and civil unrest around the world in recent years.

Several countries in the Middle East and North Africa have seen violent uprisings, resulting in heightened political uncertainty. European countries such as Greece and Spain have also seen violent protests against a backdrop of depressed economic growth and high unemployment.

The report says:

These developments have had a significant impact on the global terrorism (re)insurance market. Global unrest has triggered a growing need for civil unrest and riot coverages in some international terrorism programs. There has also been an increased number of territory-specific losses in the facultative reinsurance market, impacting local capacity.”

Guy Carpenter goes on to explain that the definition of an “act of terrorism” can be open to different interpretations:

Terrorism coverage is often incorrectly perceived to cover all violent human acts resulting in property and business interruption losses. It must in fact meet the definition of terrorism in order for coverage to apply. This has led to renewed interest in the broader political violence coverage for exposures worldwide as it provides comprehensive protection regardless of how the event is defined.”

A recent paper on terrorism risk by the Insurance Information Institute (I.I.I.) noted that despite recent counterterrorism successes, including the killing of al-Qaida leader Osama bin Laden, terrorism is an evolving and ongoing threat for the foreseeable future.

Next Page »