The terrorist attacks that ripped through the heart of London last month provided a jarring wake-up call to American insurers.Even though the attacks, which killed 55 people and injured hundreds more, are expected to result in relatively modest liability exposure according to early estimates, insurers are taking notice.
"The attacks bring the idea of terrorism back to the forefront," says Frank Fischer, manager of client relations at AIR Worldwide Corp., Boston. "After a few years of relative calm, the idea of terrorism has been out of peoples' minds. Now, however, the idea is back in the forefront and the potential risk appears to be high."
The insurance exposure in the U.K. is expected to be substantially less than the £350 million in claims that arose from the 1996 bombing in Manchester. In addition, no single company will have an exposure of more than 60 million pounds as claims against acts of terrorism are funneled through Pool Re, a special collective insurance system backed by the U.K. government.
But the recent attacks have brought back some unpleasant memories-and, of course, some jitters over the potential financial impact of terrorism. Other terrorist attacks, for example, have resulted in significant loss of property, according to the Insurance Information Institute, New York.
Consider the following: The 9/11 terrorist attacks resulted in the loss of $35 billion worth of property; the 1993 bomb near NatWest Tower in London $967 million; the 1996 IRA car bomb near Manchester mall $794 million; the1993 bomb in the World Trade Center garage $773 million; and the 1992 bomb in the London Financial District $716 million.
Such numbers are prompting insurers to revisit the possibility of future terrorist activity and the potential for economic after-effects, says Peter Ulrich, managing director of enterprise risk management with Risk Management Solutions (RMS), Newark, Calif.
"Anytime there is a terrorist attack, insurers become more aware of the fact that they really need to manage risk. It just makes the whole situation become very real," Ulrich says.
The fact that the status of the Terrorism Risk Insurance Act (TRIA) is up in the air is making insurers even more concerned (see "Does TRIA Have a Future?," previous page).
Managing the risk
To manage the risk of terrorism, some insurance carriers are turning to terrorism risk modeling software. Such programs offer insurers the chance to assess their risks and prepare financially, Ulrich says.
Both RMS and AIR offer software systems that enable insurers to get a better handle on potential terrorist liabilities. Those systems calculate the damage that could be wreaked from weapons ranging from conventional explosives to a plausible range of chemical, biological and nuclear scenarios.
"The benefit is that the insurance companies will be in business the day after a big attack occurs," Ulrich says. "While nothing can actually prepare insurance companies for the unexpected, the modeling tools allow insurers to select what risks they want to underwrite and what risks they want to avoid altogether."
The RMS Terrorism Scenario Model software, for example, enables insurance companies to analyze their exposure to high-risk targets in 228 countries, supporting the analysis of specific scenarios for virtually any location. In addition, insurers can determine if they are potentially exposed to a certain amount of risk.
For example, the software could compute whether the insurance company is exposed to more than a certain dollar amount of risk at particular locations.
Similarly, AIR's CATStation, a Web-based catastrophe risk management system, enables insurers to manage accumulations of risk at local levels.
The system helps insurers analyze concentrations of exposures and their proximity to likely targets; examine the effects of various weapons on specific buildings; perform probabilistic analyses of portfolios; and support decisions on pricing, portfolio management, and overall risk management.
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