Whether the reasons are economic,psychological, or social—or some combination thereof—terrorism hasbeen an entrenched part of human activity since ancient times.Homicidal zealotry did not begin with the first-century JewishZealots, who violently sought to overthrow the Roman rule theythought was such an affront to God. Deadly assassinations did notoriginate with the Assassins, a Muslim faction in the Middle Ageswho were known for the fearless dagger attacks they perpetrated ontheir enemies. Murderous terrorism did not begin in the FrenchRevolution's Reign of Terror, when radicals resorted to a liberaluse of the guillotine in supposed service of “liberty, equality,and fraternity.”

Although well-rooted in the past, modern terrorism is clearlydistinctive because of its international presence and catastrophicpotential. Of course, it is this destructive character that has hadsuch a marked influence on recent trends in risk management. Theregular occurrence of major international events since September11, 2001—including the New Delhi Parliament attacks (2001); theMadrid train bombings (2004); the London subway bombings (2005);and the attacks in Mumbai (2008)—demonstrate why it is safe toassume that this new breed of terrorism will be a central part ofthe risk management process for some years to come.

Challenges to Assessing Exposure Levels

Thankfully, there have been no major terrorist events onAmerican soil since the tragic events of September 11th nine yearsago. However, it is difficult to determine how indicative thisexperience will be of future events. As we are reminded every timewe go to an airport, Homeland Security still regards the risks ondomestic and international flights to be high. Conservative watchgroups like the Heritage Foundation claim that at least 30terrorist plots have been foiled since September 11th—and that onlythe highest degree of vigilance will continue to keep terrorism atbay. The difficult job of terrorism risk management can sometimesappear to be mired in subjectivity, often without benefit of thesolid actuarial data or predictable loss histories that are so mucha part of the assessment of other areas of risk.

TRIA and Its Problems

After the devastating multi-billion losses of September 11th,insurers acted quickly to exclude terrorism coverage in theirpolicies. Far from being surprising, this was a matter ofprinciple—as a rule, insurers always prefer to avoid unpredictable,catastrophic losses. It was largely the federal government's Terrorism Risk Insurance Act (TRIA)of 2002 that made insurers willing to write terrorism coverageagain.

Of course, TRIA's “safety net” did little to clarify the realextent of terrorism risk in the United States. Despite the securityit provides, TRIA has its limitations. Most notably, the $100billion program cap could mean that an insured could only receive apartial recovery in the event of a catastrophic terrorist event.TRIA also does not provide coverage for nuclear, biochemical, orchemical attacks. Furthermore, in part because terrorism coverageis optional on the part of insureds, it appears that insufficientpremium dollars are being collected to cover major losses. Criticsfear that a major terrorist event could therefore have seriousdetrimental effects not only on insurers but also the economy ingeneral, causing an erosion of the very stability TRIA sought toprovide.

Searching for a Solution

The best solution for risk managers, according to both WellsFargo and Aon, is a comprehensive counterterrorism risk managementprogram. It is crucial that every risk management team understandthe nature of its business and the potential terrorism risks thatconfront it. Every facet of the organization must beconsidered—operations, supply chains, revenue, reputation, andbusiness interruption. Both property and liability exposures mustbe considered, and liability concerns associated with security arean especially important consideration. Models and incidentmanagement planning are necessary so that all foreseeable problemscan be considered before the advent of a terrorist attack. Ofcourse, it is always important to remember that insurance is justone component in the risk management process.

It is also helpful to know that the Insurance Services Office(ISO) has done some pioneering work with terrorism modeling andrisk metrics. ISO provides guidance based on geographic locationand a definition of “primary target types.” Apart from certain“trophy targets,” which are recognized as having symbolic value,high-risk classifications are focused on factors pertaining to theimportance in the general infrastructure in addition to the overallvalue as an asset. Although ISO's statistical data may have itslimitations, it could prove to be a valuable resource for helpingto gauge terrorism risk for particular organizations.

The Future of Terrorism and 2014

Although devotees of the Mayan calendar might suggest thatterrorism will cease to be a concern in 2012, the year 2014 is acause of anxiety for many insurance company executives. TRIA wasextended in 2005 and again in 2007 but is currently set to expirein 2014. The federal government had originally thought that theprivate insurance market would assume the terrorism exposure.Although the Obama administration has been pushing for thereduction of federal involvement, insurers appear to be denouncingthese proposals with a unified voice. The National Association ofInsurance Commissioners, the National Association of MutualInsurance Companies, the Risk & Insurance Management Society,and the American Insurance Association have all stressed thenecessity of an ongoing “federal backstop” for terrorism coverage,expressing serious doubts that the private sector will be able tosustain a viable market for terrorism insurance anytime in the nearfuture.

Based on the course of human history in general and events sinceSeptember 11th in particular, the continuation of terroristactivities appears to be a practical certainty. Some of the U.S.government's future response may have to do with the future of thepolitical landscape. Budgetary constraints, calls for fiscalresponsibility, and the perceived threat (or actual occurrence) ofterrorist attacks before 2014 will certainly all play a vital rolein the availability of terrorism insurance in the years to come.Regardless, risk managers should seek to understand their owncompanies thoroughly and be posed to adapt their strategies to thechanging environment.

Barrett A. Evans, CPCU, AIC, is a regional claim managerwith Insurance House in Winston-Salem, NC. He may be reached at866-268-8383; [email protected].