In a code orange New York, the International Association of Industrial Accident Boards and Commissions (IAIABC) took a fresh look at terrorism and its relation to workers’ compensation at its recent 90th Annual Convention.
Alfred Weller, consulting actuary with MBA Actuaries Inc., moderated a panel consisting of William Bernens, senior manager – Consulting Services, AIR Worldwide Corporation; Jeffrey Bragg, executive director, Terrorism Risk Insurance Program, Department of the Treasury; and Michael Koss, risk management consultant, Snashall Associates.
Weller, noted that from a risk management perspective, the United States War on Terrorism can be analyzed in terms of two dimensions.
According to Weller, first and foremost is general loss control as evidenced by U.S. troops in Iraq and Afghanistan. Their mission is to eliminate the risk of terrorism and their success has been commendable. The second dimension is financing the cost of losses arising from acts of terrorism. Significant progress has also been made along the second dimension.
Gregory Krohm, executive director of the IAIABC, explained that “the vast majority of workers’ compensation regulators are completely unaware of the hundreds of millions of dollars of exposure to loss that could arise from a single act of madness by a terrorist. Financial and claims handling preparedness is essential. Hence, we recognized the need for this session at the convention.”
A new structure for financing risk of loss from acts of terrorism has evolved in less than three years. Three pillars of this structure are improved models and better prediction of loss, Federal support for insurance, and risk management efforts focused on terrorism.
Modeling the potential losses from catastrophe losses has reportedly become an accepted practice for rate making and financial rating in workers’ comp and as in other property and casualty lines of insurance.
Bernens began the panel presentation by describing AIR Worldwide’s (AIR) Terrorism Loss Estimation Model and its application to workers’ comp insurance. The AIR model provides insurance and risk management professionals with a comprehensive assessment of workers’ comp catastrophe risk by determining potential injuries from both conventional and non-conventional weapons. Bernens described how AIR’s terrorism model is currently used by insurers, corporations and government agencies to understand the financial impact of potential acts of terror and to manage their risk.
In his presentation, Bernens noted that workers’ comp catastrophe risk is driven by concentrations of people and their proximity to potential terrorist targets. Therefore, an essential first step is to understand where employees are located in relation to potential terrorist targets.
Bernens then demonstrated how the impact of specific scenarios-such as a truck bomb at a specific location-can be evaluated and how a fully probabilistic loss analysis can be conducted to determine potential injuries and losses. He concluded with a brief discussion on how catastrophe modeling can be used to develop effective mitigation strategies.
Bragg went on to describe the Federal Terrorism Risk Insurance Program (TRIP). He began with President Bush signing the authorizing legislation in November 2002 and continued through recent regulations on loss settlements and litigation management.
Of special importance to avoiding economic disruption from acts of terrorism is the provision for advance payments to insurers under 31 CFR Part 50 issued on June 29, 2004. Before this section was implemented, insurance industry spokespeople were reportedly making a leap of faith in assuming that TRIA cash flows could sustain insurer operations. Now they have a regulation demonstrating that insurance can continue in the face of terrorism.
Koss explained how risk managers need to think globally and act locally in dealing with the risks of terrorism as they affect individual organizations. He stressed the need for overall planning and training of personnel for a broad variety of possible scenarios. Organizations can be aversely affected both by both direct acts of terrorism against the organization and indirectly by ramifications of acts that occur elsewhere.
For example, closure of an airport can affect the ability of an organization to ship its product. Koss addressed both aspects of risk management planning.
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