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Revisiting Terrorism: Diverse challenges worth taking by risk managers

February 4, 2015

Terrorism into the mainstream of human consciousness

“Following the terror attacks in France, Western governments should avoid the temptation to see relations with MENA solely through the lens of counterterrorism, writes Jane Kinninmont. The attacks have prompted renewed denouncements of multiculturalism in some quarters, but the mood could ultimately support political parties that resist populism, writes Quentin Peel.” (Source: Chatham House).

Suddenly terrorism is neither just headline news nor flying into the face of common man but very much in the mainstream of human consciousness. Like a mutating virus defying mankind’s comprehension, its forms and spread seem at this moment to be challenging all of humanity. Just when it seems unstoppable, should insurers not re-visit their approach? Perhaps segment it to anticipate the evolving differentiation and rather just react also participate in prevention as well as mitigation. Revisit they must, as terrorism is a potential peril in any every form of cover across the non-life and life spectrums. In every which form it has a very high profile and strong socio-political ramifications both in the real and virtual space.

What next?

The first wake-up call by the ‘T’ factor in India goes back to the 1984 post Indira Gandhi assassination riots. Insurers expanded the Riot Strike Malicious Damage (RSMD) cover to an RSMTD. It took another 17 years for the next trigger in the form of 9/11 to create a Terrorism Pool in India. Just then the US created a TRIA (Terrorism Risk Insurance Act) as a means of a sovereign backing to its assets against terrorist acts. Terrorism cover predominantly remains coverage against lives and property. It needs to go beyond both in terms of scope, prevention and mitigation. Insurers ought to diversify their thought and action beyond the traditional realm.

Emerging segments

There is a growing demand world-wide for Cyber & Chemical/ Biological cover as a result of these types of terrorist attacks. There are a handful of select markets, particularly at the Lloyd’s, one of the pre-eminent hubs for specialist classes, who do offer this cover. However, coverages by most traditional carriers contain very robust & absolute exclusions regarding both Cyber, & Nuclear/ChemBio/ Radioactive coverages.

In relative terms to the wider market, say the experts in the field, this type of cover in the Terrorism sector specifically is still in its ‘infancy’ when it comes to fully understanding the exposures, implications & how to measure them in terms of safeguards, protections & aggregate management. The rest of the market continues to ponder and explore over recent years whether they ought to launch into this field, they do not seem to have got to the stage where they feel totally convinced about their readiness to justify such a big step that could have potentially ‘unquantifiable’ implications for them.

Insurers need to change the tack

Rather than just embark upon what is insurable and maintain a clear line of divide vis-à-vis all that is uninsurable, insurers need to accept terrorism as a fact of life. In the foreseeable future this will be one trigger that has the potential for generating significant ‘socio-economic’ losses. With the state slowly but steadily getting its upper hand over big events, terrorist acts will perhaps assume a low severity (in terms of asset class) but high implication (as in cyber or bio chem classes) and high frequency. Even in a traditional low severity scenario the non-financial implications could be high. Imagine the trauma caused to the sensitive segments of any society. Hence this allusion to ‘socio-economic’ rather than mere economic losses.

Some of the specialist markets do underwrite Terrorism Liability, but these usually contain the standard exclusion along the lines of “mental injury, anguish or shock where no bodily injury has occurred to the litigant”. It is interesting that not all specialist terrorism markets offer liability cover (it’s probably about 50/50, according to the experts). They believe that there is to date no sound case law for such cover (as it is a relatively new product in insurance terms which only really formally emerged quite a while after the 9/11 events). Interestingly, feel some observers that there is currently a case underway (not sure in which court jurisdiction) where a foreigner is apparently suing a prominent hotel as a result of him jumping out of a window during the 2008 Mumbai attacks, ‘but whether anything will ever come of this is hard to gauge’, says an expert. In his opinion “it can be extremely difficult to prove negligence or liability for ‘damage’ following such events, even if the defendant did not have effective security protections in place at the time.”

Insurers also need to participate in the distant early warning protocols which could alert not just them but society at large about future potential signals and triggers. Take for instance the excessive use of ground water to boost the cotton cultivation in Salamieh region of Syria. Followed by a drought and mass migration to urban areas, the unemployed economic refugees became a fodder for the socio-political uprising fuelling its own form of middle – east terrorism. A close cooperation between agriculture  and micro insurers could have set the alarm ringing for the terrorism underwriters whether or not it was about to precipitate something insurable in the present.

In the realm of SciFi

Picking a few of Ray Kurzweil’s predictions:

  • 2030s: Virtual reality will begin to feel 100% real. We will be able to upload our mind/consciousness by the end of the decade
  • 2040s: Non-biological intelligence will be a billion times more capable than biological intelligence. Nanotech foglets will be able to make food out of thin air and create any object in the physical world at whim
  • 2045s: We will multiply our intelligence a billion fold by linking wirelessly from our neocortex to a synthetic neocortex in the cloud

We are not talking about too distant a future nor does it call for high imagination to figure out how an evil intent could terrorise such extra-ordinary capabilities.

In conclusion

While most insurers would stick to this as a generally acceptable global definition for a terrorist act:

“….. acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes”.

This in no way casts the current coverage and role of insurers in stone. In very many ways here could be an opportunity for insurers to play a more significant mainstream societal role in pre-empting and mitigating the scourge of terrorism. Whether or not they choose to underwrite it they could still warm up as risk managers, while it holds its sway now and in the predictable future.

From → Articles

2 Comments
  1. Terrorism is a simpler example of network risks that are now morphing as the main threats (Global warming is another) . These are not easy to locate in one actor, have a interplay of many forces and break out somewhat suddenly with great force.

    Essentially Insurers have tended to cover for well understood risks. These generally are assumed to display stable characteristic esp in terms of severity and frequency. However in modern industrialized world technology change is endemic and there is hardly any part of the supply chain which is stable. Many moving pieces all undergoing change. Add to this we are in a geopolitical strain ( partly caused by severe identity dislocations in large parts of the population ) and in uncharted economic terrain with the central bankers trying to avoid global deflation…

    The interconnected system is also fairly non linear and small changes can lead to fairly large impact ( Thailand Floods on Auto supply chains) . The notion of proximate cause may not be very relevant.

    Since the system has many feedback loops and is constantly changing and non linear and dynamic it is unlikely to lend itself to statistically stable probability distributions and extreme value analysis used in Insurance pricing.

    Therefore Insurers need to innovate or be ignored.

    Capital market solutions where parties with different economic results form a proximate cause swap the risk return make more sense. This does not require stable predictable probabilities but a shared venture in facing the unknown . The parties on each side of the swap have their own assumptions of probability of loss but know the impact pretty well.

    Insurers need to focus more on impact of a event and not their probability and develop pools of stakeholders who are on opposite side of economic outcomes . Then a risk reward sharing mechanism can work.

    A example of these ideas in Supply chain Risk management was explored in HBR
    https://hbr.org/2014/01/from-superstorms-to-factory-fires-managing-unpredictable-supply-chain-disruptions

    • Thanks Arvind! You make some very profound observations. Unfortunately insurers tend to be obsessively linear. There ought to be a paradigm shift from this obsessive compulsive style to something more relevant like what you have anecdotally alluded to!

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