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Terrorism: understanding & mitigation

The recent attack in the Algerian desert served as a reminder that terrorism is an ever-present threat. Steve Coates discusses the risk management and insurance implications

THE RECENT ATTACK in the Algerian desert served as a reminder that terrorism is an ever-present threat – and no one knows how or where it will strike next. S

The World Economic Forum recently issued its 8th report on Global Risks. It examines different threats on a twin axis of impact and likelihood. It should come as no surprise that terrorism remains towards the higher end of the spectrum, a fact of particular concern given that it can have an immediate financial impact.

While developed countries have suffered comparatively few major attacks since 9/11, in general global terrorist activity has increased significantly over the past decade. If anything, the fragmentation of Al Qaeda has brought greater unpredictability as new groups emerge that may share Al Qaeda’s beliefs but are not funded by them. Some of the most high-profile attacks over recent years have been the Madrid bombings in 2004 (where 191 people died and damage was $125m), the London attacks in 2005 and Mumbai in 2008 (where 170 people died and damage to three hotels totalled more than $110m) plus suicide bombings across Moscow.

From a UK perspective, the threat remains as real as ever. Various IRA splinter groups are still active, and the conviction in February 2013 of three men in Birmingham for plotting a 7/7-type attack reminds us that we remain a target. Apart from the terrible human consequences, the financial impact can be enduring and far-reaching. The biggest cost of 9/11, for example, was not the loss of the Twin Towers per se, but the business interruption it caused.

Despite the effectiveness of counter-terrorism measures, it remains one of the most dynamic of risks, and it brings unique challenges. Terrorists retain the ability to adapt their behaviour, change tactics and even move country in a bid to pursue their aims. As improved security makes certain places harder to hit, they can switch to softer targets.

Moreover terrorists can shape their tactics at a given location to maximise injury or damage such as deploying a number of devices or attacking in the rush hour. This all makes terrorism fundamentally different and less predictable than many other perils, such as storm, because it has the ability to generate losses where the location, severity and frequency are highly uncertain.

So what does this mean for UK plc? First, do not be lulled into a false sense of security by the recent lack of successful attacks. Just because the UK has not been hit by a major storm since 1990 does not reduce the risk of one happening in the future. Terrorism is no different in that respect. Secondly, the risk of terrorism is such that all stakeholders (primarily government, insurers and business) must take it seriously and treat it as they would any risk of similar potential. For businesses this means dealing with terrorism within their internal risk governance framework, which would typically include:-

Identification – consider the type of terrorism the business might face, including the knock-on impact from an attack in the surrounding area or on the supply chain.
Prevention – can an attack be prevented or discouraged through security measures, intelligence or liaison with counter-terrorism agencies?
Quantification – assess the financial impact of potential types of attack.
Mitigation – plan how to reduce the impact of an attack, for example through business continuity planning.
Risk transfer – via insurance.

Insuring against terrorism
Many countries decided after the 9/11 attack that providing cover against terrorism required collaboration between government and insurers. The event was on a scale well in excess of anything the insurance industry and their reinsurers had ever anticipated. Capacity in the global insurance market is finite and, in light of the heavy losses suffered in 2001, insurers and re-insurers felt unable to offer capacity without government assistance.

In fact, mainland Britain already had a scheme in place to provide terrorism cover with government backing, set up following the IRA bomb attacks on mainland UK in the 1980s and early 1990s. The UK insurance industry had established Pool Re in 1993 when it became clear that a new system was required. Pool Re reinsures its members (insurance companies and Lloyd’s syndicates) so that they can offer terrorism Property cover to any commercial customer who requests it. Crucially, the scheme has a government guarantee and is therefore financially watertight.

Without going into the detail here, your broker or insurer can arrange the insurance as an extension of your Property policy. It will include protection against CBRN (chemical, biological, radiological and nuclear) attacks. Business interruption cover can be purchased for an additional payment.

No matter how robust your security measures, terrorism will always remain a threat. Whilst nothing can ever compensate for the human consequences, it is possible to protect against the financial impact.

Steve Coates is head of market operations at Pool Re

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