Terrorism Insurance

1. Our World Post 9/11 and the effect on the Insurance Industry Terrorism Insurance

2. What is Terrorism Insurance?An Introduction of Terms • Insurance purchased by property owners for losses and liabilities that may potentially occur due to an act of terrorism • “act of terrorism” = any act certified by the Secretary of Treasury, in concurrence with the Secretary of State and Attorney General, to be an act that is dangerous to human life, property, or infrastructure and to have resulted in damage within the U.S. or on the premises of a U.S. mission (Wikipedia) • Homeland security: “the concerted effort to prevent attacks, reduce America’s vulnerability to terrorism, and minimize the damage and recover from attacks that do occur.” (White House) "Terrorism Insurance." Web. <www.wikipedia.com>.

3. Mega Terrorism: A New Extreme • 20 years ago, terrorism consisted of local activities • Recent years: extremist, religious based terrorism • Fewer attacks but much more serious • Many “near misses” • Different type of target • Federal  business • Potential to destabilize entire nations • Need specific response techniques (Michel-Kerjan, and Pedell 61-76)

4. 9/11 : The Effects on the Insurance Industry • 3,000 fatalities from over 90 countries • Total losses = $31.6 billion ($39.5 billion in 2008) • 2/3 of losses paid for by reinsurers • Capital base severely hit  stopped covering this risk • Both sides surprised • Companies were covered • 150 Insurers and Reinsurers were financially responsible • Insurance claims included: commercial property – business interruption – workers’ compensation – life – general liability • Most of these reinsurers were European • Financially, a European crisis (Kunreuther, and Michel-Kerjan 201-214)

5. 9/11: Terrorism Insurance Pre-9/11 Post-9/11 • 1993: WTC attack • 1995: Oklahoma City bombing • Terrorism losses small, uncorrelated • Coverage offered to businesses free • included in most standard all-risk commercial and homeowners’ policies • Reinsurers reduce or eliminate terrorism offerings • Terrorism insurance that was offered became much more expensive • Report: National Bureau of Economic Research • 2003: the effect on Chicago’s O’Hare airport • Insurance Services Office takes action (Kunreuther, and Michel-Kerjan 201-214)

6. A Temporary Solution: TRIA (Terrorism Risk Insurance Act) • Private sector groups called for federal intervention • Construction and Real Estate industries being held back • Passed by Congress, signed into law by President Bush • Insurers obligated to provide an insurance policy against terrorism carried out by foreign people or interests Federal government: 90% Insurer: 10% *up to $100 billion "Terrorism Insurance." Web. <www.wikipedia.com>.

7. A TRIA Timeline • November 26, 2002 first signed • Set to expire December 31, 2005 • Extended: new expiry date December 31, 2007 • Terrorism Risk Insurance Program Reauthorization Act • Second extension: expires December 31, 2014 Differences in Extensions

8. Will TRIA be renewed again?Some alternatives… • Market Approach • Private market for terrorism insurance allowed • Recurring cycle • Mutual Insurance Pools • Like co-insurance, group of companies provide reinsurance to each other • Spreads the risk • 2004 Towers Perrin assessment • Public-Private Partnerships • Through continuing TRIA, or creating a similar program • Wouldn’t want a government only program • Required Insurance • Similar to requiring fire insurance • 5 states required before TRIA • Linking Mitigation with Insurance • Social programs to reduce the occurrence of terrorism • Regulations, standards, incentive programs (Kunreuther, and Michel-Kerjan44-51)

9. Terrorism Insurance Around the World • Australia • 2003: terrorism exclusions in commercial policies invalidated during terrorist incident • Covers chemical, biological, NOT nuclear • France • 1986: law that terrorism must be covered • 2002: Reinsurance pool • Germany • 2002: private insurers cede commercial insurance coverage above certain limit to a pool • Spain • 1941: government-sponsored, privately-managed pool • UK • Reinsurance pool; government the reinsurer of last resort "Terrorism Risk and Insurance." N.p., n.d. Web. 28 Nov 2010. <www.iii.org/media/hottopics/insurance/terrorism/>.

10. Terrorism Insurance: Demand • Data from Insurance broker Marsh • 800 businesses and government entities • Renewed property insurance policies • 45% also bought terrorism insurance in each of first 3 quarters of 2004 • Aon’s findings • 57% of 500 commercial accounts that renewed between 10/1/03 – 9/30/04 purchased terrorism insurance • 20-30% demand increase for coverage early in 2003 • Lower prices • More terrorist alerts (Kunreuther, and Michel-Kerjan44-51)

11. (Michel-Kerjan, and Pedell 61-76)

12. Terrorism Insurance: Challenges & Difficulties • Traditional insurable risks • 1. able to identify and quantify chance of event occurring and extent of losses likely • 2. ability to set premiums for each potential customer(s) • Terrorism risks challenge both of these qualifications • Catastrophic loss potential • Dynamic uncertainty • Ambiguity • Interdependence (Kunreuther, and Michel-Kerjan44-51)

13. Works Cited Kunreuther, Howard, and Erwann Michel-Kerjan. "Policy Watch: Challenges for Terrorism Risk Insurance in the United States." Journal of Economic Perspectives 18.4 (2004): 201-214. Web. 28 Nov 2010. Kunreuther, Howard, and Erwann Michel-Kerjan. "Terrorism Insurance 2005." Insurance: Where do we go from here? (2005): 44-51. Web. 28 Nov 2010. Michel-Kerjan, Erwann, and BurkhardPedell. "How Does the Corporate World Cope with Mega-Terrorism? Puzzling Evidence from Terrorism Insurance Markets." Journal of Applied Corporate Finance, A Morgan Stanley Publication 18.4 (2006): 61-76. Web. 28 Nov 2010. "Terrorism Insurance." Web. <www.wikipedia.com>. "Terrorism Risk and Insurance." N.p., n.d. Web. 28 Nov 2010. <www.iii.org/media/hottopics/insurance/terrorism/>.