Prior to September 11 attacks ten years ago, the thought of terrorism didn’t loom large in our nation’s collective psyche or our business decisions; since then, however, it has become a constant factor. Just last month, the initial reaction of many who experienced the earthquake in the eastern United States thought that they were experiencing the effects of a new wave of terrorist activity. It’s an understandable response given the way terrorism has now become such a real and present threat.
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. Lexington Insurance Co. 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. 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.
Another hindrance to designing effective terrorism coverage was that with terrorism exposures – unlike natural catastrophe disasters, which have abundant historical data and sophisticated modeling to rely on – there was little to use as a baseline for underwriting the coverage.
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. An office building in a major city has different vulnerabilities than a hotel in a resort area. 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 private sector facilities become increasingly vulnerable as government assets have become better protected.
Insurers are working with clients as they develop their own security practices and procedures. Many companies are now working on ways of protecting employees by diverting traffic to secure locations in the event of a threat or replacing windows with bomb-proof glass. 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 the nation spending $100 billion annually on counter-terrorism efforts, it’s tempting to believe our good fortune in avoiding another mass casualty attack will hold. Since 9/11, there have been approximately 39 thwarted terrorism attempts on the United States, and while some observers doubt that terrorist organizations have the capability to launch another attack as coordinated and devastating as 9/11, reducing the impact of another major event remains largely within our own control.
Eighty percent of terror attempts have been exposed through the vigilance of law enforcement and the public. The actions and cooperation of federal, state, and local governments as well as the general public will help maintain safety and security in an increasingly dangerous world.
John Cogliano oversees property terrorism at Lexington Insurance Co.
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