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TERRORISM RISK IN INSURANCE SECTOR T.Y.BBI (SEMESTER VI)

INTRODUCTION ON TERRORISM

Terrorism is the systematic use of terror

especially as a means of coercion. There is no

internationally agreed definition of terrorism. Most

common definitions of terrorism include only those acts

which are intended to create fear (terror), are perpetrated for an ideological goal (as

opposed to a lone attack), and deliberately target or disregard the safety of non-

combatants.

Some definitions also include acts of unlawful violence and war. The history

of terrorist organizations suggests that they do not select terrorism for its political

effectiveness. Individual terrorists tend to be motivated more by a desire for social

solidarity with other members of their organization than by political platforms or

strategic objectives, which are often murky and undefined. The word "terrorism" is

politically and emotionally charged, and this greatly compounds the difficulty of

providing a precise definition. One 1988 study by the US army found that over 100

definitions of the word "terrorism" have been used. A person who practices

terrorism is a terrorist. The concept of terrorism is itself controversial because it is

often used by states to delegitimize political opponents, and thus legitimize the

state's own use of terror against those opponents.

While acts of terrorism are criminal acts as per the United Nations Security

Council Resolution 1373 and domestic jurisprudence of almost all countries in the

world, terrorism refers to a phenomenon including the actual acts, the perpetrators

SYDENHAM COLLEGE OF COMMERCE &ECONOMICS

http://en.wikipedia.org/wiki/Anti-terrorism_legislation

http://en.wikipedia.org/wiki/United_Nations_Security_Council_Resolution_1373

http://en.wikipedia.org/wiki/United_Nations_Security_Council_Resolution_1373


of acts of terrorism themselves and their motives. There is disagreement on

definitions of terrorism.

DEFINITION

One of the changes made to TRIA with the enactment of the Terrorism Risk

Insurance Program Reauthorization Act of 2007 was a revision to the definition of

an act of terrorism that eliminated the requirement that an individual or individuals

that carry out an act of terrorism be acting on behalf of a foreign person or foreign

interest. In short, this means that acts formerly referred to as "domestic" terrorism

may now be certified as an act of terrorism under TRIA.

Section 102(1) defines an act of terrorism for purposes of the Act. Please

note that the unmodified reference to "the Secretary" refers to the Secretary of the

Treasury. The revised Section 102(1)(A) states, "The term "act of terrorism" means

any act that is certified by the Secretary, in concurrence with the Secretary of State,

and the Attorney General of the United States—(i) to be an act of terrorism; (ii) to

be a violent act or an act that is dangerous to—(I) human life: (II) property; or (III)

infrastructure; (iii) to have resulted in damage within the United States, or outside

the United States in the case of—(I) an air carrier or vessel described in paragraph

(5)(B); or (II) the premises of a United States mission; and (iv) to have been

committed by an individual or individuals, as part of an effort to coerce the civilian

population of the United States or to influence the policy or affect the conduct of

the United States Government by coercion."



HISTORY OF TERRORISM

The term “terrorism” was originally used to describe the actions of the

Jacobin Club during the "Reign of Terror" in the French Revolution. "Terror is

nothing other than justice, prompt, severe, inflexible," said Jacobin leader

Maximilien Robespierre. In 1795, Edmund Burke denounced the Jacobins for

letting "thousands of those hell hounds called terrorists" loose upon the people of

France.

The term "terrorism" was originally used to describe the actions of the

Jacobin Club during the "Reign of Terror" in the French Revolution. "Terror is

nothing other than justice, prompt, severe, inflexible," said Jacobin leader

Maximilien Robespierre. In 1795, Edmund Burke denounced the Jacobins for

letting "thousands of those hell hounds called terrorists" loose upon the people of

France.

In January 1858, Italian patriot Felice Orsini threw three bombs in an

attempt to assassinate French Emperor Napolean III. Eight bystanders were killed

and 142 injured. The incident played a crucial role as an inspiration for the

development of the early Russian terrorist groups. Russian Sergey Nechayev, who

founded People's Retribution in 1869, described himself as a "terrorist", an early

example of the term being employed in its modern meaning. Nechayev's story is

told in fictionalized form by Fyodor Dostoevsky in the novel The Possessed.



German anarchist writer Johann Most dispensed "advice for terrorists" in the

1880s.

TYPES OF TERRORISM

In the spring of 1975, the Law Enforcement Assistant Administration in the

United States formed the National Advisory Committee on Criminal Justice

Standards and Goals. One of the five volumes that the committee which was

entitled Disorders and Terrorism, produced by the Task Force on Disorders and

Terrorism under the direction H.H.A. Cooper, Director of the Task Force staff. The

Task Force classified terrorism into six categories.

Civil Disorders – A form of collective violence interfering with the peace,

security, and normal functioning of the community.

Political Terrorism – Violent criminal behavior designed primarily to generate

fear in the community, or substantial segment of it, for political purposes.

Non-Political Terrorism – Terrorism that is not aimed at political purposes but

which exhibits “conscious design to create and maintain high degree of fear for

coercive purposes, but the end is individual or collective gain rather than the

achievement of a political objective.”

Quasi-Terrorism – The activities incidental to the commission of crimes of

violence that are similar in form and method to genuine terrorism but which

nevertheless lack its essential ingredient. It is not the main purpose of the quasi-

terrorists to induce terror in the immediate victim as in the case of genuine



terrorism, but the quasi-terrorist uses the modalities and techniques of the genuine

terrorist and produces similar consequences and reaction. For example, the fleeing

felon who takes hostages is a quasi-terrorist, whose methods are similar to those of

the genuine terrorist but whose purposes are quite different.

Limited Political Terrorism – Genuine political terrorism is characterized by

a revolutionary approach; limited political terrorism refers to “acts of terrorism

which are committed for ideological or political motives but which are not part of a

concerted campaign to capture control of the State.

Official or State Terrorism –"referring to nations whose rule is based upon

fear and oppression that reach similar to terrorism or such proportions.” It may also

be referred to as Structural Terrorism defined broadly as terrorist acts carried out

by governments in pursuit of political objectives, often as part of their foreign

policy.



CHAPTER NO: 1 TERRORISM RISK

1.1 INTRODUCTION

Terrorism risk differs from other risks, as it amorphous and unpredictable.

These risks by definition are not random and characterized by very low frequency

coupled with little historical data. The characteristic feature of terrorism risk is its

man- made nature, the possibility of high spillover on the macro economy and the

greater complexity in modeling it.

Unlike natural disasters, terrorism risk is different cup of tea. Terrorists react

to new information and adapt to our efforts to mitigate the potential damage they

might unleash. The more security we apply to potential target, the less likelihood

that terrorist will strike that target. It is a vicious circle. Nations create new

security, terrorist change their tactics, and countries, in turn pursue new avenues to

secure against future attacks.



Every attack is different, in its execution, methodology, or choice of target.

Other than the terrorists, the government of the country plausibly has some inkling

of potential terrorist threats. However, for oblivious security reasons, they

generally cannot share what they know about terrorist and their activities. This

could endanger the effectiveness from terrorism is not possible; the only possibility

is reducing its likelihood, mitigating its impact, or managing its consequences.

The biggest problem is the lack of information. Insurers need accurate risk

information to determine appropriate pricing, reserving and investment strategies.

Without this information, creating an insurance cover is not possible. Terrorists,

rely on stealth to maximum the disruption and destruction they cause. Therefore,

unlike natural disaster, terrorist do not follow predictable patterns. They are

manmade events, subject to the ingenuity and technology of the terrorists.

Terrorism risk is not new in itself, but the 9/11 incident has brought it to the

discernment of insurers, reinsures and industry experts. Before 9/11 incident

terrorism risk was being covered free of cost as the chance of property damage

from terrorist acts were considered remote. But, the magnitude of the losses

suffered during 9/11 incident brought tremors in the insurance industry and the

society at large. Insurers had also cautioned that any another event of comparable

magnitude could do irrevocable damage to the industry. Following September 11

attack, insurance companies abstained themselves from renewing the coverage for

terrorist events particularly for large business and those perceived to be at some

risk like the aviation industry. The reinsurers excluded terrorism from coverage



which in turn compelled insurers to start excluding these risks from commercial

policies when they came up for renewal.

1.2. NATURE

Terrorism risk is different from the kind of risks which are typically defined

by industry experts. These risks are not homogeneous and vary by factors like

geographical location, industry, company reputation, and level of defensive

preparation. These risks by definition are not random. In contrast to storms or car

accidents, these attacks are carefully planned and coordinated and the losses from

these attacks are high magnitude. Also, these risks are not well understood. With

catastrophe risks like hurricanes and earthquakes, tremendous amount of data is

available on the probability but dearth of credible data pose problems to ascertain

the price for the risk. Terrorism risk is characterized by very low frequency with a

very little historical data. The insurer needs to know about the likelihood, extend of

damage and accumulated risk resulting from insuring buildings within a given

geographical area including fire after a terrorist attack. Hence, there is a need to

quantify the risk so as to decide upon the coverage and the premium for the cover.



Companies are approaching the issue by using reliable risk assessment

models from the experiences of other countries such as Great Britain, Germany,

France and Italy. According to the modeling firm, AIR Worldwide, the way

terrorism risk is measured is not much different from assessments of natural

disaster risk except that the data used for terrorism are more subject to uncertainty.

It is easier to project the risk of damage in a particular location from an earthquake

of a given intensity or a Category 5 hurricane than a terrorist attacks and therefore

the data to incorporate into models are readily available.

1.3. COMPONENTS

Experts have jotted down three major components in Terrorism risk, namely:

1) Threat,

2) Vulnerability, and

3) Consequence.

THREAT

A terrorist threat to a city or region has the direct impact on occurrence of an

attack on the city, and hence increases the possibility of loss due to terrorist attack.

For example, if one city were known in the course of gathered intelligence or

previous history to be the favored target for terrorist attacks, this observation

would hold a claim that this city has a large intensity of terrorism risk in future.

Terrorist groups pose a threat when they have the objective and competence to



entail harm to a country. It may be noted that mere objectives without competence

or competence without objectives acts as threat. Hence, both are compulsory for

existence of Threat from a terrorist group. For the governments to allocate

domestic security resources to safeguard significant infrastructure or cities

necessitates quantifying the threats posed to the targets or specific nature of

attacks. One needs to study the scope of threat in terms of a specific set of targets,

a specific set of attack types, and a specific time period, to apply probability which

could be used as a measure of the likelihood of a terrorist attack. Threat could be

measured in terms of the probability that a specific target is attacked in a specific

way during a specified time period, i.e. Threat = Probability (terrorist attack

occurs).

VULNERABILITY

Vulnerabilities within a region also represent logical targets for terrorism

due to its close relation with the infrastructure of the city. Say if a city has an

atomic or nuclear power plant, it is obvious that the city could be more targeted for

the terrorist attacks. The threat of terrorism is a dynamic one as it acclimatizes to

conditions that affect the possibility of attack achievements. We use Probability to

measure the likelihood that vulnerability will show the way to damage when

terrorist attacks occur. Measure (Vulnerability) could be defined as the probability

that damages involving fatalities, injuries, property damage, or other consequences

occur, given a specific attack type, at a specific time, on a given Target. I.e.

Vulnerability = Probability (attack results in damage attack occurs).

CONSEQUENCE



Terrorists aim to create maximum loss to the target city or region in terms of

men and material. Hence the possible consequences of terrorist attacks need to be

taken into account when quantifying terrorism risk. Consequence can be defined as

the extent and type of damage resulting from successful terrorist attacks. In order

to measure the consequence, we need to quantify the expected magnitude of

damage (e.g., deaths, injuries, or property damage), given a specific attack type, at

a specific time, that results in damage to a specific target or.

Consequence = Expected (damage attack occurs and results in damage)

Consequence can be computed by taking into account the damages, fatalities,

injuries, economic losses. This list is not exhaustive, and we can take other aspects

of consequences also. For the practical purposes, we limit our focus to mortality,

morbidity, and economic loss at the point of attack in order to demonstrate an

approach to risk estimation in a way that is transparent yet appropriate to real-

world policy decision making.

TERRORISM RISK AS A FUNCTION OF THREAT, VULNERABILITY, AND

CONSEQUENCES

Terrorism risk can be defined as the anticipated consequences over some

period of time to a distinct set of targets, consequential of a definite set of threats.

Therefore we can see that threats, vulnerabilities, and consequences play a

considerable part in the overall terrorism risk to which a country is exposed.



Terrorism Risk can be measured as the expected consequence of an existing threat,

for a given target, attack mode, and damage type. Terrorism risk is the product of

threat, vulnerability and consequence (Terrorism Risk= Threat X Vulnerability X

Consequence).

Terrorism Risk= Probability (attack occurs) X Probability (attack results in

damage | attack occurs) X Expectation (damage | attack occurs and results in

damage).

ESTIMATING THE COMPONENTS OF TERRORISM RISK

In practice threat, vulnerability, and consequences are all conditional on

significant uncertainties, and hence the task of estimating each component

becomes daunting. To aid risk estimation function, one needs to understand the

different sources of these uncertainties which affect terrorism risk. Variability and

error in estimating all the components and, ways to value different types of

consequences are two important sources of uncertainty in estimating terrorism risk.

TERRORISM MODEL COMPONENTS



Terrorism Risk Models are developed to assess impacts in terms of property loss,

economic losses, injuries and fatalities, confidence level and feelings of security of

citizens and businesses, and innumerable additional potentially pertinent effects.

Risk can similarly be articulated in terms of any one, or a combination, of these

consequences. Here value judgment (depending upon relative importance of

different consequences) is adopted to evaluate each type of consequence in

terrorism risk. Each type of risk can be combined mathematically into a single-

dimensional aggregate risk.

AN APPROACH TO TACKLING THE TERRORISM RISK QUANTIFICATION TASK HAS

BEEN OUTLINED, FROM WHICH THE FOLLOWING PRINCIPAL OBSERVATIONS MAY

BE DRAWN:



1) The frequency and severity of planned attacks will depend critically on the

network architecture of the terrorist organization.

2) Pressurized increasingly by counter-terrorist forces, terrorist organizations may

adapt to form emergent swarm clusters. These rapidly forming virtual cells,

communicating via internet, will be very hard to detect and stop.

3) Emergent networks will facilitate the execution of more frequent, but less

ambitious and generally less damaging, planned attacks.

4) An event-tree may be constructed to estimate the probability that a planned attack

will succeed, depending on the availability and usage of intelligence; the

effectiveness of security barriers; and technical and logistical mishaps.

5) The loss severity distribution may be derived by mapping losses from realistic

showpiece terrorism insurance scenarios, and assigning a cost function to each.

The cost function reflects practical logistical factors such as planning time,

technical difficulty, and consumption of scarce resources .

6) The overall computation of a terrorism loss exceedance curve can be achieved,

provided that the assignment of subjective input probabilities is made using the

formal elicitation of expert judgment, such as has been invoked already by

government security agencies.

RISK OF DYING



Smoking 10 cigarettes a day One in 200

All natural causes age 40 One in 850

Road accident One in 8,000

Playing soccer One in 25,000

Homicide One in 100,000

Terrorism attack in 2001 One in 100,000

Hit by lightning One in 10,000,000

Terrorism attack in 1990’s One in 50,000,000

CHAPTER NO: 2 TERRORISM

INSURANCE

2.1. INTRODUCTION



Before understanding the meaning of any risk let us first learn what

Insurance is. Insurance is an act or an instance of insuring. The consideration for

this is called as premium. Now lets move on to terrorism risk insurance. The 9/11

terrorist attacks, have defined a new risk i.e. ‘Terrorism Risk’. Terrorism is not a

current phenomenon, and is apparently a multifaceted phenomenon falling between

the nexus of war and peace. Terrorist attacks have earlier taken place, in US and at

various parts of the world like the Oklahoma city bombings in the year 1995, and

terrorist attacks on World Trade Center in the year 1993, but it was only after 9/11

WTC attacks, terrorism was given status of a potential risk capable of large scale

destruction. For this underestimation of terrorism risk, many insurance companies

had to pay huge price, and quite many went bankrupt.

The concept of Insurance which started with covering Marine risks has been

adapted to different risks. Terrorism is a new risk posing challenge for the

insurance industry. The terrorist attacks which took place over the past two

decades have significantly altered the economic and security settings world over.

In this direction the insurance industry and Governments around the world are

enduring to create and refine the risk management facilities and systems which

would enable national and global business interests to persist with confidence

regardless of the capricious and catastrophic nature of terrorism risks. In this paper,

an attempt is made to study risk management issues of Terrorism Risk.

The insurance industry and Governments around the world are enduring to

create and refine the risk management facilities and systems which would enable

national and global business interests to persist with confidence regardless of the

capricious and catastrophic nature of terrorism risks. This paper attempts to study



the funding issues related to the occurrence terrorist attacks i.e. how a terrorist

event is funded by the terrorist groups and how government, individuals, and

insurance companies share the losses of such terrorist event.

2.2. EXISTENCE

Terrorism insurance is insurance purchased by property owners to cover their

potential losses and liabilities that might occur due to terrorist activities. It is

considered to be a difficult product for insurance companies, as the odds of

terrorist attacks are very difficult to predict and the potential liability enormous.

For example the September 11, 2001 attacks resulted in an estimated $31.7 billion

loss. This combination of uncertainty and potentially huge losses makes the setting

of premiums a difficult matter. Most insurance companies therefore exclude

terrorism from coverage in Casualty and Property insurance, or else require

endorsements to provide coverage.

On December 26, 2007, the President of the United States signed into law

the Terrorism Risk Insurance Program Reauthorization Act of 2007 which extends

the Terrorism Risk Insurance Act (TRIA) through December 31, 2014. The law

extends the temporary federal Program that provides for a transparent system of

shared public and private compensation for insured losses resulting from acts of

terrorism.

The United States insurance market offers coverage to the majority of large

companies which ask for it in their policies. The price of the policy depends on

where the clients are residing and how much limit they buy.



2.3. ROLE PLAYED BY US GOVT.

Congress enacted and the President signed the law in November 2002, the

Terrorism Risk Insurance Act of 2002 (The Act). This federal law provides a

federal backstop for defined acts of terrorism and imposes certain obligations on

insurers. The Act was extended for a two-year period covering Program Years

2006 and 2007. The Act has now been extended for an additional seven years

through December 31, 2014 with the enactment of the Terrorism Risk Insurance

Program Reauthorization Extension Act of 2007.

Several provisions of the initial Act have changed in the 2007 extension. Those

changes include:

Revising the definition of a certified act of terrorism to eliminate the

requirement that the individual(s) are acting on behalf of any foreign person or

foreign interest.

Extending the program through December 31, 2014.

Requiring clear and conspicuous notice to policyholders of the existence of the

$100,000,000,000 cap.

Fixing the Insurer Deductible at 20% of an insurer's direct earned premium, and

the federal share of compensation at 85% of insured losses that exceed insurer

deductibles.

Fixing the program trigger at $100,000,000 for all additional program years.

Requiring the U.S. Treasury to promulgate regulations for determining pro-rata

shares of insured losses under the program when insured losses exceed

$100,000,000,000.



Requiring the Comptroller General to study the availability and affordability of

insurance coverage for losses caused by terrorist attacks involving nuclear,

biological, chemical, or radiological materials and issue a report not later than

one year after the enactment of the Terrorism Risk Insurance Program

Reauthorization Act of 2007.

Requiring the Comptroller General to determine whether there are specific

markets in the United States where there are unique capacity constraints on the

amount of terrorism insurance available and issue a report not later than 180

days after the enactment of the Terrorism Risk Insurance Program

Reauthorization Act of 2007.

Requiring the President's Working Group on Financial Markets to continue an

ongoing study of the long-term availability and affordability of terrorism risk

insurance.

Accelerating the timing of the mandatory recoupment of the federal share

through policyholder’s surcharges.

Other terms of the Act, as amended by the Terrorism Risk Insurance Extension Act

of 2005, remain unchanged.

2.4. PRESENT SCENARIO



Prior to 9/11, the scenario was very different. Terrorism risk was not

considered a substantial enough risk and was usually included at no additional

premium in most property and casualty policies. Evidently, in case TRIA had not

bee enacted, the coverage would have been totally withdrawn.

This is exactly what happened after 9/11. Between 9/11 and the one-year period

before TRIA was enacted, terrorism insurance premiums were prohibitively

high. As a result, take-up was very low in spite of the dire need for such

coverage and the climate of fear and perceived risk that pervaded the nation.

What is more, the entire country was plunged into massive uncertainty.

After the enactment and extension of TRIA, the take-up has increased not just

among large businesses but, in the mid-sized and personal lines, as well. From

estimated 40% in2003 immediately after the enactment, it has gone up to almost

60% collectively in these sectors in 2007.

Today, the take up rates are not artificially low, in spite of a government

backstop facility—which shows that there is no unwarranted subsidization, and

that the program is being run on more or less commercial lines. However,

average rates for the coverage dropped from the highs by 25% on an average

between 2004 and 2005, and again by another 30% between 2005-06 because of

the provisions of TRIA and TRIEA.

Take-up levels are spread across the country and industries, which rates the

highest in the North East and Mid West, followed by the West and South.

Industries that have gone in heavily for terrorism insurance are in sectors if

healthcare, media, hospitality, real estate, financial services, education and

transportation.



The insurance sectors as well as the potential insured’s are largely adopting a

professional stance of offering coverage at reasonable rates and of going in for

coverage wherever it is merited, respectively. This was possible because of

TRIA and TRIEA. If one analyzes the natural catastrophe scenario in

earthquake-prone California, take-up rates hover around the region of 12 to

15% because of high premiums.

So, unlike what was presumed in 2002, it seems to be a foregone conclusion

today that a backstop facility that was adequate to take care of any possible attacks

would have to continue, the threat of terrorism itself continues unabated, if one

takes into account the London and Madrid bombings, as well as those in Delhi,

Mumbai, Hyderabad, etc. in 2005, 2006 and 2007 respectively, and more recently

in Baghdad, Bangalore and Ahmadabad in July 2008. Under the circumstances if

the backstop was lifted, reinsurance would become scarce, rates would harden and

reinsures might even exit the market once again, as they did after 9/11. One can

recollect that the private reinsurers paid about $22 billion out of a total of $33

billion in insured losses after 9/11, but exited the market druid the period after that

till TRIA was enacted because of the unpredictable risk of terrorism, which was

not something any reinsurer would willingly take on. A look at the actual figures

would say why: industry estimates place the terrorism reinsurance capacity

worldwide at around $6 to 8 billion, which is very meager as compared to

requirements.



CHAPTER NO: 3

INDIAN TERRORISM INSURANCE

3.1. TERRORISM IN INDIA

Terrorism in India can be attributed to many low intensity conflicts within

its borders. The regions with long term terrorist activities today are Jammu and

Kashmir, Mumbai, Central India (Naxalism) and Seven Sister States

(Independence and Autonomy Movements). In the past, the Punjab insurgency led

to militant activities in the Indian state of Punjab as well as the national capital

Delhi (Delhi serial blasts, anti-Sikh riots). As of 2006, at least 232 of the country’s

608 districts were afflicted, at differing intensities, by various insurgent and

terrorist movements. Terrorism in India has often been alleged to be sponsored by

Pakistan. After most acts of terrorism in India, many journalists and politicians

accuse Pakistan's intelligence agency, the Inter-Services Intelligence of playing a

role.

3.2. TERRORISM INSURANCE IN INDIA

After World Trade Center (WTC) happened, reinsurers started excluding

terrorism from coverage which in turn compelled insurers to start excluding these

risks from commercial policies as and when they were renewed.

Businesses in India are not fully covered against terrorism- related risks.

Obsessed with profit considerations corporate prefer simple covers without any



odd-on like terrorism cover. The corporate apathy to insurance coverage also stems

from competitive pressure in the market.

Projects/ businesses financed by multilateral or financial institutions and

banks are covered due to the terms and conditions imposed by the leaders. Once

the loans are cleared even state governments, leave alone businesses, prefer leaving

the assets uninsured. The strategy is driven by the need to keep the cost down. In

case of state-owned power undertakings, insurance premium add significantly to

the operations and maintenance costs.

Let us take the case of IT companies where bottom lines are better, the

companies are cash-rich and proactive. In spite of repeated warnings from

intelligence agencies, a number of domestic IT companies have not opted for

terrorism risk cover. Only multinational companies and very few domestic

companies like Infosys Technologies Ltd., Wipro Ltd., Aztec and iGATE among

others have opted for comprehensive cover that includes terrorism risk. Some

companies co0ver terrorism risk only for their units located in sensitive areas. The

major reason for this reluctance is the desire to reduce the premium outflows and

ensure higher profits.

Leave alone the general public, even the government properties and

embassies are uninsured government opts for increased security instead of

spending on insurance cover. This is not the case in other countries such as US. In

the US, all government property is insured apart from the property related to

defense. India has to follow the suit. Only then, the message would percolate down



to the masses. If the government decides to go for an insurance cover, the foreign

reinsurers would be more than keen to provide reinsurance.

3.3. IMTP (INDIAN MARKET TERRORISM POOL)

In many countries, government acts as a reinsurer of last resort for terrorism

insurance. While they provide reinsurance at the highest risk levels, private

insurers and reinsurers cover some or all of the lower tiers of risk example France

(GAREAT), Germany (Extremus), the UK (Pool Re), and the US ( the Terrorism

Risk Insurance Act, TRIA).

India has an edge over other countries when it comes to terrorism insurance.

The terrorism cover in the country is offered by general insurance companies

through a common pool which presently has a corpus of more than Rs.1, 000crore.

Around a dozen insurance companies in India provide terrorism insurance as an

add-on cover to the regular fire insurance policy. The Insurance Regulatory and

Development Authority (IRDA) have mandated that all general insurance

companies should be allied to the common pool for terrorism insurance, set up to

compensate claims for terror attacks.

The developed world relied on the ruling governments to establish a separate

terrorism pool to take care of probable contingencies. TRIA is a case in point. In

pleasant contrast, the India Market Terrorism Pool (IMPT) was set up in 2002 with

a corpus of Rs.200crore after attacks on the World Trade Center in New York.

This pool covers companies and institutions and liability of Rs. 750 crore per

location, including material or property loss or damage and also business



interruption losses. The pool is managed by the General Insurance Corporation

(GIC).

The terrorism risk pool ensures that insurance companies are not affected

when claims emanate following terrorism incidents. The premium collected by the

insurers goes into the pool. The insurers are allowed to draw money from the pool

to compensate the claimants for damage sustained during terror attacks. Insurance

officials fear that if the spates of terror attacks continue unabated as they have the

pool of Rs. 1,200 crore could be wiped out within the next few occurrences. Post

26/11, premium rates could harden.

3.4. DEVELOPMENTS

Unlike the 9/11 attacks in the US, which resulted in companies having to

shell out more for insurance covers or entities such as airlines operating without

terrorism insurance, Indian companies can breathe easy. Because of the terrorism

insurance pool created after the terror strikes in the US, insurers said, costs will be

manageable for Indian companies and they will continue to get risk covers.

“I do not see any impact since terrorism is not new to India and now

premiums are decided within the country,” said General Insurance Corporation

Chairman and Managing Director Yogesh Lohiya. Earlier, global reinsurers raised

the premium or often levied a surcharge after terrorist attacks as risk perception

changed. This resulted in companies having to pay higher premium.



The Insurance Regulatory Developmental Authority (IrDA) has mandated

all general insurance companies be allied to a common pool for terrorism

insurance. So, premium of terrorism insurance collected by all general insurance

companies flows into a common pool. Any terrorism related insurance claim is

settled by using funds from this pool.

“Terrorism insurance is offered as an add-on cover and an individual would

have the choice to request the same while insuring property,” said Rajive Kumara

swami, head (reinsurance), ICICI Lombard General Insurance. Unless Taj and

Oberoi hotels had insurance policies specifically covering acts of terrorism for

which they had paid an additional premium amount, the damages suffered by these

hotels during the present attack will not be compensated by the insurance

company, said Diljeet Titus, founder and managing partner of Titus & Co, a Delhi-

based commercial law firm. ICICI Lombard is the co-insurer for Taj Mahal Hotel.

It could not be ascertained from the two hotels, which are under siege if they

have terror covers or not. Lohiya, however, said losses did not appear to be

significant. In any case, he said, losses up to Rs 700 crore were covered by the

pool.

For additional losses arising out of a terror strike, separate protection from

global reinsurers is in place.

Insurers said that with terror attacks on the rise, the number of individuals

opting for terrorism insurance is on the rise. Companies such as ICICI Lombard



General have advised customers to call their toll-free number to register claims

arising due to the attacks in Mumbai.

MEGA RISK PROJECTS GETS INDIAN INSURANCE COVER

State-owned insurance companies are looking at the possibility of providing

terrorism cover to several mega risk policyholders including Dabhol Power

Company and Reliance's Jamnagar refinery following the decision of global

underwriters to withdraw insurance against terrorism.

Indian Petrochemicals Ltd plant in Baroda and Indian Oil Corporation's

Cochin refineries also belong to the mega-risk category. In the absence of a cover

against terrorism, claims arising out of any terrorist attacks would not be honored

by insurers.

When contacted, New India Assurance chairman and managing director K N

Bhandari, who is also the chairman of General Insurers' (Public Sector)

Association of India or Gipsa said that the four state-owned general insurers would

meet on Thursday to chalk out a strategy for mega risk policies. He said that

around 10 mega policyholders in India including some HPCL and BPCL refineries

have to do without a terrorism cover.



Mega risk policies are those where the probable maximum loss, which is a

percentage of total assets given the spread of these projects, is estimated at over Rs

10.54 billion.

Given the size of the Indian non-life insurance market, almost the entire

amount, less the mandatory 20 per cent premium which is to be ceded with the

General Insurance Corporation, is reinsured with global reinsurers which results in

significant dependence on the international market.

GIC also keeps only a small portion of the sum that is reinsured with it and

follows a treaty arrangement with other global players in its segment of operation.

In case of fire and engineering policies, a 10 per cent surcharge has been levied to

generate the resources following the global decision by insurers.

In India, till the September 11 attack on US, a separate premium for

terrorism in most business segments was not charged. Though claims from terrorist

infested areas like Jammu and Kashmir, Punjab and the north-east did come to the

insurers they were treated as normal losses, unlike the present global norm where a

separate charge is being levied.

3.5. LIMITATIONS

Terrorist attacks on the Trident Oberoi and Taj hotels and the Nariman

House in Mumbai have brought to the fore the limitations of the existing terrorism

pool in that it does not insure public liability and personal accident. The terrorism



pool, which has a corpus of about Rs 1,000 crore, at present insures only damage

to property.

The Mumbai attack is on private property and the loss arising from public

liability (liability of the hotel towards the guests and visitors in it) and personal

accident may be larger as the damage to properties of Trident Oberoi and Taj

hotels will be paid by insurers from the terrorism pool.

But if the hotels had taken a cover against public liability and personal accident,

the burden will devolve on the insurance companies, who will receive no help from

the terrorism pool.

Mr S.S. Gopala Rathnam, Managing Director, Cholamandalam MS General

Insurance, told Business Line that the issue of insuring public liability and personal

accident was raised during the last terrorism pool meeting. Most insurers felt that

having a surplus (Rs 1,000 crore) and not providing sufficient coverage did not

make sense, he said. The terrorism pool was set up in the aftermath of 9/11

incident in the US as many insurance and re-insurance companies suffered major

losses and avoided providing cover.

Therefore, the terrorism cover, as a peril was excluded from direct insurance

coverage. Each country developed its own terrorism pool — where the premiums

for covering terrorism risks will be transferred to a major corpus. In India, the pool

is managed by the General Insurance Company.



CHAPTER NO: 4

FACTS ON TERRORISM INSURANCE

4.1. PRICING

Internationally, product pricing in the case of terrorism insurance is difficult

for a host of reasons. For one, it is difficult to predict the types and frequency of

future attacks. For another, it is equally difficult to spread the risk of losses from

terrorism over a sufficiently large base of clients. This makes it difficult for

insurance companies to offer affordable policies. The governments also frequently

regulate the types that need to be covered and the rates that can be charged.

The risk assessment is carried out on the basis of the loss experienced. It is

evaluated in terms of the number of people who buy that cover. Two things will

happen: The Mumbai incident probably will increase the cost of terror-related

insurance as more companies and individuals opt for coverage. The risk will get

pulled out over a large segment of people. On the other hand, pricing would be



guided by the loss experienced. Proper pricing will start evolving over a period of

time. But in the immediate future prices are bound to go up on account of the

nature of the Mumbai attacks and the nature of the loss. The potential reinsurance

losses to the London reinsurance market will certainly prompt terrorism

underwrites to take a relook at their terrorism rates for India.

Premium for terrorism cover were around Rs. 0. 25 per Rs1, 000 of the total

sum insured, and would most likely be revised soon in the wake of the Mumbai

attacks. Reports suggest that premiums could go up by 50% or more. Terrorism

insurance is mostly offered as a rider or add-on cover to the main policies by

domestic insurers in India. Internationally, it is available even as a stand-alone

policy. The IRDA is being urged to consider approving a approving a proposal that

will allow terrorism cover to be sold as a stand-alone policy.

4.2. DEMAND FOR COVER

Post Taj and Oberoi incidents, scores of luxury and star-rated hotels

institutions and buildings, are rushing to enhance the scope of existing insurance or

seek fresh cover. Non-life insurers are seeing a surge in enquiries. Even top

executives are seeking additional cover. The number of individuals opting for

terrorism insurance is on the rise due to heightened awareness. 26/11 has made real

estate developers worry about the safety of their projects and therefore a rush for

insurance cover. Currently, only a few developers like Delhi-based DLF take



insurance coverage for their projects. Most of the developers take insurance

coverage for some specific projects only.

The IRDA expects the industry to create new and innovative policies to

provide cover against terror attacks. The terrorism insurance products will have to

be upgraded and the rate of premium might change depending upon the evolution

of new products that the industry may come up with. In view of more and more

entities opting for terror insurance, the funds in the common terror insurance pool

will be increasing.

4.3. DIRECTOR’S & OFFICER’S LIABILITY INSURANCE (D&O) AND

TERRORISM INSURANCE

Liberalization, privatization and globalization have opened new vistas for

insurance industry. Some of the insurance products, which had low profile before

liberalization, such as the Director’s & Officer’s Liability Insurance (D&O) and

insurance against terrorism risks, have gained momentum in the new insurance

regime. The directors are the agents of shareholders of a company. In

administration and management of a company, they play a multidimensional role.

In the process of administrative actions and corporate management, some of the

actions and decisions initiated, may directly or indirectly influence the working of

the company and the company may face financial and non-financial risks. The

company may incur liabilities to the various parties who suffer a loss because of

the actions and decisions of the company and its directors and officers. The

directors or officers may get protection to a certain extent under the provisions of

various laws. They may incur liabilities as some of the decisions taken in good



faith may fail and they may be asked to compensate the losses. At this point of

time, the insurance policies covering the risks of liabilities of Directors and

Officers come to the rescue of the companies. Terrorism is one of the burning

issues of socio-economic factors and poses a challenge to the government. Every

society, across the globe has either experienced the risk of terrorism or is under a

threat in one or the other shape. Insurance companies have designed some policies

to secure property and persons against terrorism risks.

CHAPTER NO. 5

TRIA, TRIEA AND TRIREA

(ACTS OF TERRORISM INSURANCE)

5.1. TRIA (TERRORISM RISK

INSURANCE ACT)

The Terrorism Risk Insurance Act (TRIA) was designed to stabilize the

property and casualty insurance market following the Sept. 11 terrorist attacks.

TRIA created a federal terrorism reinsurance program to serve as a federal

backstop for terrorism insurance in the case of future terrorist attacks. The law

requires the federal government to cover 90 percent of terrorism-related losses, up

to a total of $100 billion, once insured losses reach certain trigger levels. Insurers,

meanwhile, are required to offer terrorism coverage to commercial policy holders,



in return for the federal government backstop. TRIA applies to only commercial

property and casualty risks.

TRIA was passed as a temporary measure to help stabilize the economy

following September 11. The Act was originally scheduled to expire at the end of

2005. However, Congress passed a two-year extension, and TRIA is now due to

expire on December 31, 2007. The insurance industry will encourage Congress to

pass a further extension or implement a permanent program to ensure that

terrorism insurance is available, before TRIA expires.

A report from Treasury indicates that TRIA has worked well but should not

be made permanent. Some members of the Congress are in agreement with the

report. Others support a permanent extension of the Act. Congress is expected to

address the issue in 2007.

IMPORTANCE

Terrorism is an uninsurable risk unless there are limits to protect against

catastrophic terrorism exposure. A federal backstop is necessary to provide

coverage for terrorism losses above the capacity that the private insurance and

reinsurance markets can reasonably bring to bear. Insurance has an important role

in our economy by helping people recover from the unexpected. In that respect, the

Act is good for the nation, good for the economy and good for commercial

customers.

TRIA does not impact State Farm as much as other insurers, because TRIA

does not apply to personal lines insurance, such as personal homes and autos,

which are the largest share of our business. Also, we don’t insure the kind of



business the bill was primarily designed to cover, such as large commercial

buildings and construction projects. State Farm’s commercial business is focused

on smaller businesses and organizations which tend to be spread out

geographically rather than concentrated in one area.

5.2. TRIEA (TERRORISM RISK INSURANCE EXTENSION ACT)

The US Congress took a midway approach and barely days before the expiry

of TRIA a two-year modified extension—the first extension—known as terrorism

as Terrorism Risk Insurance Extension Act (TRIEA, 205) was passed. So, in the

midst of a debate that rocked the entire nation about whether TRIA would be

extended after the sunset clause become active on December 31, 2005, the

modified version of TRIA became operational on January 1, 2006 for a period for

two years, till January 208.TRIEA, the modified Act, was a slightly toned down

version of the original TRIA where the government continued with the backstop

facility, although primary insurers now had to pay higher deductible and co-

payments. This was perceived to be in the fitness of things because indefinite and

intensive government involvement in private insurance often leads to moral

hazards—among many other draw backs.

IMPORTANCE

The greatest success TRIEA is that they have provided stability to the

private insurance markets. And that is in spite of the fact that the funds provided by



this backstop have not been tapped even once, and not a single tax dollar has been

spent from these funds on terrorism linked insurance. Of course, one has to take

into account that after 9/11, there have been no acts of terrorism of that magnitude.

So, the importance of the extension is briefed below:

It come from the fact that there was a deeper underlying objective than what

merely met the eye and protecting the insurance sector was actually a secondary

fallout of TRIA’s provision; the primary objective was to give enough comfort

to insurers to enable them to offer much-needed insurance for terrorism to

consumers at premiums that are affordable. The insurance sector could do that

largely on the strength of the psychological comfort derived from TRIA and

TRIEA. The signal sent out was that although it was not necessary to evoke the

Act during this period, the government was always there as reinsurer of last

resort should the need have arisen.

Even more than this was the comforting expectation that in a climate where

government involvement was statutorily spelt out through TRIA or other

similar Acts, the government itself would work in partnership with private

insurers to develop a pre-emptive plan and course of acts before an attack rather

than reacting after crisis. This could only happen it its involvement was total, as

through TRIA and its extensions.

This partnership would result in better-integrated disaster management

programs more funds for predictive and pre-emptive action, and greater

competency building trough joint action brought to the table.

Most terrorism insurance is meant for commercial insured’s, who need it not

just for security, but for may other peripheral purpose such as to get a mortgage,

expand business premises or go in for a new construction, failing which they



could run into massive losses because of interruption in their business. Very

negative fallout of 9/11 that went almost publicized was that a lot of important

construction activity encountered a stalemate in the US soon after 9/11 since

home loan lenders insisted on terrorism coverage as a precondition to lend, but

insurers were not willing to offer coverage for terrorism. This was the real

stability afforded by TRIA when it was enforced later. In fact, 9/11 construction

work in many important projects in the US was stalled because of terrorism risk

exclusion clauses which would otherwise have gone down precipitously.

5.3. TRIREA (TERRORISM RISK INSURANCE REVISION AND EXTENSION

ACT)

At a time when the sunset clause for TRIEA was due shortly (on January

1,2008), there has been less vocal debate—unlike before—on whether the Act

should at all be extended. What it implied is that today, it is given that the federal

backstop facility, albeit in a modified form, is an imperative for more than one

reason. And so, work towards the next amendment passage of this modified Act

went on at feverish pace well before the TRIEA sunset clause on January 1, 2008,

in the form of H.R.2671—The Terrorism Risk Insurance Revision and Extension

Act of 2007 (TRIREA). On December 18, 2007, the House of Representatives

gave final approval to H.R.2671, by a bipartisan vote of 360 to 53. It extends the

federal backstop facility for a period of seven years (up to 2014).



Since the Bush administration has the power of veto Congress’ proposal,

much depended on there stance. The Bush administration had stipulated three

objectives which could underline the renewal of TRIEA:

The program should remain of a short-term nature, and therefore temporary.

Its scope should not be expanded.

Private insurers should continue to increase their retentions.

But, TRIEA has not come back on these terms:

The extension this time is for the next seven years.

In scope has been expanded to include both foreign and domestic terrorist

attacks—there was a widespread demand for this.

5.4. REASONS FOR THE MODIFICATIONS

The reasons for the two extension provision are as follows:

I. There is a widespread realization today both among insurers as well as the

government that it would take a while for a full-fledged private catastrophe

market to develop.

II. Resetting renewals of the Act at the interval of two to three years creates a lot

of uncertainty in the minds of insurers, and actually inhibits them from attaining

self-sufficiency in the long run. Therefore, the extension this time around would

need to be of a substantially longer period so that insurers do not have to

grapple with piecemeal efforts to set up a self-sufficient private market.



III. Given the fact that NBCR episodes are high probability, apart from leading to

large insured losses wherever they are covered by the federal backstop, the

government would like draw the line at this, for the present. However, there is a

provision for periodic reviews which shows the government’s concern on this

issue. Here, it must be mentioned that the contribution of organizations like

Coalition to Insure Against Terrorism (CIAT) which has bee working closely

with the Congress and other stakeholders to have the program renewed and also

get new enhanced features included has been instrumental in a major way in

achieving these objectives.

IV. What are the signals that came through from these extensions and

modifications? Merely this: that there was a clear refusal on the part of the

government to go in for a long- term commitment at the very outset. One reason

was that government waiting to see whether a resourceful private market did

develop between 2002 and 2005, or not. It did not. Even if that did not happen,

the second three-year extension sent clear signals to private insurers that they

should continue with business as unusual as far as possible and not take

government involvement as a matter of right. This, in turn, is expected to hem

in the typical dangers that are associated with government intervention in

insurance, i.e., moral hazard and adverse selection as well as cross-

subsidization of affected groups through higher taxes imposed on citizens of

states that have not been affected. The other sobering influence was the higher

deductible and co-payments that private insurers were required to pay with each

revision, showed the government’s purpose not to crowd out private insurance,

but only to give it time to stabilize itself.



The Table shows the two extension of TRIA:

TRIA, TRIEA AND TRIREA : SOME PERSPECTIVES

TRIA TRIEA TRIREA

Period November 2002 to

December 31,

2005

January 2006 to

December 31, 2007

January 2008 to

December 2014

Coverage Most commercial

and P&C business

Many P&C business Many P&C

business, foreign

and domestic acts of

terrorism, NBCR

coverage only when

the underlying

property is insured

against it

Exclusions Health, crop, flood

covered by

National Flood

Insurance, life,

medical

All the above, farm

owners multiperil,

commercial auto,

Trigger The event is

certified as an act

of terrorism after

US $5 million in

insured losses

US $5 million until

March 31, 2006

US$5 million from

march 31, 2006 to

December 31, 2006

US $100 million in

US $100 million

from December 31,

2007 until further

notification



2007

Deductible 15% (from 2002

to 2005)

17.5% (2005-2006)

20% (2007)

Retain current level

of insurer

deductible at 20%

of direct earned

premium for insured

terrorism losses

Federal

reinsurance

90% 90% (2005-2006)

85% (2007)

Retain current level

of 85% federal

reinsurance and

15% insurer co pay

5.5. DEVELOPMENTS

Payment of TRIA Losses Above $100 Billion: President Bush signed a long-

term extension of the Terrorism Risk Insurance Act (TRIA) on December 20,

2007. The law included a provision that requires the U.S. Department of the

Treasury to establish a process for the allocation of pro-rata payments in the

event that terrorism-related insured losses exceed the federal government’s

annual $100 billion program cap. The law states that no insurer may be required

to make any payment for insured losses in excess of its deductible and its share

of insured losses.



The Treasury report on the pro-rata payment process submitted to Congress in

April 2008 sets out goals for implementation but does not include a date for

completion. The law requires final regulations by August 22, 2008. The goals

include reducing the potential for inequitable treatment of policyholders in

terms of the timing and location of losses and the policyholder’s insurer,

reducing potential litigation and adequately addressing changing circumstances

presented by subsequent events or by the development of new, more accurate

information regarding insured losses.

Availability and Affordability of Coverage: In July 2008, the U.S.

Government Accountability Office (GAO) issued preliminary results of a study

on the availability and affordability of terrorism coverage in large metropolitan

areas. The report said that while commercial property terrorism insurance seems

widely available at rates policyholders believe is reasonable, certain types of

policyholders may have more difficulty obtaining the coverage amounts they

need at prices they view as acceptable. These policyholders are typically

owners of high-value properties in urban areas where there is a high

concentration of large buildings that are seen as potential terrorism targets. The

GAO said that some insurers remain concerned about their exposure to

terrorism losses and their efforts to minimize potential losses appear to be the

primary reason some policyholders are facing challenges in obtaining coverage.

There no consensus within the industry on whether TRIA should be modified,

the GAO noted. However, it summarized several proposals, including lowering

insurer deductibles in areas where an attack has taken place, allowing insurers

to establish tax-deductible reserves for terrorist attacks and changing the

Internal Revenue Code to encourage the issuance of catastrophe bonds, see



Insurance Issues Update reports on Reinsurance

and the Background section to this report.

Terrorism Insurance Market: A report from

insurance broker Marsh Inc. indicates that take-up

rates for terrorism coverage—the percentage of

firms buying the insurance—have increased

significantly since 2003, when Marsh began

tracking purchases made by clients. In 2003, only

27 percent of survey participants bought terrorism insurance but, according to

the latest Marsh study of trends, in 2006, 59 percent of the 1,437 clients

participating in the survey purchased the coverage, even though property

insurance rates overall increased that year, up slightly from 58 percent in 2005.

Companies most likely to include terrorism coverage as part of their property

insurance were the largest firms and entities, including financial services

institutions, real estate businesses, utilities, and educational and health care

facilities. The highest take-up rates were in the Northeast and Midwest, but

every region had a take-up rate greater than 50 percent. Ninety percent of

Marsh clients that purchased the coverage did so as part of their property

policies rather than as a stand-alone coverage, Marsh notes.

Potential Losses: Risk Management Solutions (RMS), a risk modeling firm,

said in July 2008 that estimated insured terrorism losses rose 8 percent in the

past year to $1.6 billion, due mostly to the growing threat of chemical and

biological attacks. RMS also said that terrorism targets are more likely to be in

the commercial or private sector, such as sports stadiums, now that

governments’ counter-terrorism efforts have been stepped up. Since 2001 some



two dozen potential terrorist plots have been uncovered in the United States,

mostly targeting New York or Washington.

CHAPTER NO. 6 COUNTRIES WITH

LONG-TERM TERRORISM INSURANCE

PROGRAMS

According to the policy agenda of The Real Estate Roundtable, the following

countries are the only ones in the world with long-term terrorism insurance.

1. Australia

2. Austria

3. Finland



4. France

5. Germany

6. Israel

7. Namibia

8. Netherlands

9. Russia

10. South Africa

11. Spain

12. Switzerland

13. Turkey

14. United Kingdom

SPECIAL TERRORISM INSURANCE PROGRAMS IN OTHER COUNTRIES

The United States is not the first country to establish a terrorism insurance

program. Some countries created programs to cover to terrorism after September

11 or earlier, following a terrorist attack on their own soil. Below are some

examples.

AUSTRALIA: Legislation was passed in 2003, under which terrorism exclusions in

commercial policies are nullified once the government has declared that a terrorist

incident has occurred. The legislation also created a reinsurance pool to cover

insurance company losses from property, business interruption and third-party

liability coverage’s, subject to a certain insurance company deductible, about 4

percent of property insurance premium. Insurers pay premiums into the pool which

is back-stopped by the government. The program covers chemical and biological

attacks but not nuclear attacks.



AUSTRIA: A terrorism pool has been in operation in Austria since January 2004.

The pool provides reinsurance protection against property damage and business

interruption up to a certain limit. Insurers issue a separate terrorism policy and then

transfer or “cede” the business to the pool. Participation in the pool is voluntary but

almost all insurers belong.

BELGIUM: Under requirements that took effect in May 2008, all insurers must

offer coverage for terrorism under most of the policies they issue, with the

exception of coverage for certain kinds of risks such as nuclear facilities and mass

transportation mechanisms such as trains, airplanes and ships. Insurers are not

required to offer stand-alone policies for terrorism. The law creates a terrorism

pool with total limits of 1 billion Euros, divided into three tiers: direct market, first

tier 300 million Euros; reinsurance, second tier 400 million Euros; and the Belgian

government, upper tier, $300,000.

FRANCE: Under a law passed in 1986, terrorism must be covered. Since 2002,

terrorism has been covered by a reinsurance pool to which terrorism risk above a

certain retention level is transferred. Insurers pay premiums to the pools which are

divided up among the participants in each of the four different layers of risk with

the government-owned Caisse Central de Reassurance (CCR) receiving 10 percent

of premiums for providing the top layer of unlimited coverage. The government

pays for all terrorist claims that exceed a specific amount. Premiums are set

according to the insured amount, not the riskiness of the location.

GERMANY: Private insurers cede commercial insurance coverage written above a

certain limit to a pool. The pool, in turn, cedes all its risk to other insurance



companies, which act as reinsurers. The ultimate layer of protection, for which

insurers pay reinsurance premiums, is provided by the government. The program

was extended for two years at the end of 2007 and after 2009 will probably be

renewed again but for a lower amount, Germany’s Finance Minister said in making

the announcement of the extension. The government pays claims above an

aggregate amount.

NETHERLANDS: A terrorism reinsurance company was created to reinsure its

member companies who retain a percentage of the risk. Coverage is limited per

member and in the aggregate. Life and property/casualty insurers participate in the

pool, as well as health insurers.

SPAIN: Beginning in 1941, Spain has had a government-sponsored but privately

managed pool which provides coverage against injury, property damage and

business interruption due to catastrophes, natural and man-made. Personal lines as

well as commercial are covered. Coverage for extraordinary risks is mandatory.

The original need for terrorist coverage stemmed from acts of violence carried out

by the Basque separatist movement, which has been active in Spain for many

decades. The 2004 Islamic terrorist bomb attacks in Madrid exacerbated the risk.

Private insurers may provide catastrophe coverage but they are still required to

make payments to the pool, which is backed by an unlimited guarantee from the

government.

SWITZERLAND: Beginning in 2003, insurers can cede all property risk insured for

a sum above a certain amount to a reinsurance facility.



UNITED KINGDOM: The government formed a

mutual reinsurance pool for terrorist coverage in 1993,

following acts of terrorism by the Irish Republican

Army. Insurance companies pay premiums at rates set

by the pool. There are two geographic zones, one for

major cities, with an adjustment for a "target risk,"

and the other for the remainder of the country. The

primary insurer pays the entire claim for terrorist

damage but is reimbursed by the pool for losses in

excess of a certain amount per event and per year.

This is based on its share of the total market. The maximum industry retention

increases annually per event and per year. Following the World Trade Center

disaster, coverage was extended to cover all risks, except war, including nuclear

and biological contamination, aircraft impact and flooding, if caused by terrorist

attacks. The government acts as the reinsurer of last resort, guaranteeing payments

above the industry retention.

6.1 ROLE PLAYED BY GOVERNMENT IN TERRORISM INSURANCE



Prior to September 11, 2001 attack; terrorism insurance was available from

private market insurance firms in a number of countries. But, after 9/11, the private

insurers and reinsurers were unwilling to provide such insurance with growing

concern of major losses to the industry in the absence of government support.

Today, in most countries where terrorism insurance for commercial properties is

offered, it is only due to the intervention of government. The government

intervention can be in the form of primary insurer, responsible for all insurance

functions, including defining the coverage, setting the prices, and bearing the risk.

This type of intervention is observed in countries like Israel where complete

coverage for injury, life and property risks arising from terrorism is given to all

persons without direct cost. The government absorbs the entire risk, which is

financed from general tax revenues. Even Northern Ireland offers a parallel

compensation program for losses due to terrorism.

6.2. THE COUNTRIES OFFERING GOVT-BACKED INSURANCE

Most countries have government backed terrorism pools nowadays and

although insurers pay premiums, or, are in some cases bound to co payments,

government themselves have become quite munificent. The backstop facility is

now extended to a wide gamut of risks and can sometimes offer unlimited

reinsurance coverage. Some governments as in the United Kingdom have gone a

step further in terms of professionalism and have adopted a well-chalked about

public-private partnership model in the running of these pools and other programs

offered.



UNITED KINGDOM: In 1993, the government set up a terrorist reinsurance pool,

to which insurance companies pay premiums. The premiums are based on the

geographical location of the risk. There are two geographical zones, one for large

cities, and the second zone for the rest of the country. Premiums are fixed with a

further adjustment on the basis of ‘target risk’. Insurers initially pay the entire

claims amount, but are reimbursed by the pool for the losses that exceed a certain

amount per event, on an annual basis. Industry retention goes up every year, with

the government guaranteeing payments above the level. Following 9/11, the pool

stated extent coverage for nuclear, biological, weapon risk, aircraft impact and

other risks caused.

AUSTRALIA: Under 2003 legislation, all terrorism exclusions in commercial

insurance covers become null and void once the government announces the

occurrence of an act of terrorism. Subsequent to the passage of this Act, a

reinsurance pool has been launched to offer cover to insurance companies for

losses arising out of property, third party liability and business interruption.

Insurance companies pay a deductible equivalent to 4% of their property insurance

premium. There is a federal backstop facility, which covers chemical and

biological attacks but not radiological and nuclear ones.

FRANCE: Terrorism covers have been offered here since 1986. Since 2002, it has

been covered by a reinsurance pool. Terrorism risk above a certain level is

transferred to the pool. The fund is created by insurers paying premiums to the

pool, which is earmarked for each insurer, in each of the four layers of risk. In

keeping with the federal backstop facility here, the government pays all terrorism

insurance claims above a predetermined amount. Premiums are governed by the

amount of cover and not necessarily by other risk factors.



BELGIUM: The laws here have recently undergone a change and under the new

law that will become effective in January 2008, government backstop coverage

will be available up to euro 1 billion, inflation adjusted annually. Insurers will pay

the initial contribution of euro700 million to the fund, with the government paying

the rest. A Committee formed by insurers will be deciding whether an event meets

the definition of an act of terrorism.

GERMANY: Private insurers transfer all commercial insurance coverage above a

certain limit to a pool. The highest layer of insurance claims is borne by the

government. Insurers pay a reinsurance premium for transferring this risk to the

government. This procedure will continue till December 2007, and become null

and void unless it is renewed.

SPAIN: Spain has had a long-standing catastrophe coverage program dating back

to 1941. This pool is owned by the government but managed by private reinsurers.

It offers personal and commercial coverage for property and casualty, and business

interruption lines caused by natural and man-made catastrophes. Private insurers

have to contribute to a pool even if they offer coverage themselves. The

government provides an unlimited guarantee for the pool.

CHAPTER NO.7 CHALLENGES



Terrorism presents many challenges to the global insurance industry. There

is greater potential today for exceptionally large losses due to terrorism than the

past decade. Today, there are an increasing number of religion-based terrorist

groups, many of whom advocate mass casualties (Hoffman.1998; Stern, 2003;

Sandler and Enders; 2004). Also, the decisions taken by the government on various

policies can provoke the terrorist groups to attack a certain country. In addition to

this, actions by both the private and public makes the risk of future terrorist events

extremely difficult to estimate.

Insurers find difficulty in pricing

terrorism insurance because of uncertainty

associated with the risk. Also, the data on

terrorist groups and their activities are

generally not revealed by the government for

national security reasons. Hence, it presents a

problem for modelers to predict the terrorist

attacks in the future. The existence of

interdependencies also poses a challenge towards the pricing of the policy. Many

firms have refrained themselves from investing in protection because they know

that the lapse on the par of others can greatly affect them even though they take

plenty of protection because to avoid them. In theory, a social insurance program

can institute regulations and standards to reduce these negative externalities to

achieve a socially optimal level of investment in protection, but it may not be easy

to implement these measures (Kunreuther and Heal, 2003; Heal and Kunreuther).

The 9/11 events as well as the anthrax attacks, have established a new kind of

interdependent vulnerability. In the case of the 9/11 attacks, security failures at



Boston’s Logan airport were responsible for the crashes at the World Trade Center,

the Pentagon and in rural Pennsylvania.

7.1. RESPONSE BY GLOBAL PLAYERS

Terrorism Risk Insurance Act (TRAI) in US came into existence on

November 26, 2002. The intention of TRAI was to offer terrorism coverage to the

commercial policyholders and to prevent potential insolvency arising from

underwriting terrorism risks. Prior to 9/11 attack, terrorism risks for property were

covered under all-risks policies, where all hazards were covered except the named

exclusions. But the catastrophe of 9/11 events compelled insurers to exclude terror

from property policies. The intention of the enactment was to give time to private

insurance markets to stabilize and build capacity for this peril thereby protecting

the consumer’s interest. But due to insufficient insurance industry capacity and

limited scope for covering certified acts of terrorism. TRAI was modified as

Terrorism Risk Insurance Program Reauthorization Act of 2007(TRIPRA)

extending TRAI till December 31, 2014.

Austrian insurers in 2002 had created ‘The Austrian Terror Pool’ in response

to the changing perception of risk following the growing threats of terrorist events.

They have come up with a separate policy for property damage and business

interruption arising from acts of terrorism. The cover against terrorism is optional;

however, a majority of Austrian Insurance Association members belong to the

pool.



Belgian has come up with draft laws with respect to terrorism insurance,

which is expected to become law shortly. The Act guarantees the cover of

terrorism claims up to a global annual limit of Euro 1 billion which can be

modified by the government depending on the development of the economy. The

participation to the pooling agreement is not compulsory. Each participant will

shell out Euro 700 million and the Belgian government will make a contribution of

Euro 300 million. In case of no agreement between the Belgian government and

the participants of the fund, the discretion power lies with King. In absence of

King’s decision the Belgian government compensates up to a maximum of Euro

300 million.

In 2002, the Association of German Insurers and the German government

formed Extremus, a German specialist company covering terror-caused property

damage. The capacity provided on an annual aggregate basis is Euro 10 billion.

Euro 2 billion of capacity is placed with domestic and foreign insurers as well as

reinsurers and Euro 8 billion is provide by the German government.

Israel has two different government-backed programs which provide

property-casualty and life and health insurance. The Arab War Risks Insurance

Syndicate established in 1981 is a group of approximately 110 member insurance

and reinsurance companies from 18 Arab countries. Its key objective is to help the

insurance companies situated in the Middle East and providing war cover during

the Iran-Iraq War.

After the 9/11 incident many countries have become more conscious of

terrorism risk and have come up with new approaches to overcome it. This became



essential as reinsurer companies refused to renew the commercial policies which

were having coverage against terrorism and started withdrawing terrorism cover

from them. Reinsurers started excluding the damages caused perils other than fire

and explosion or started charging very high medium thereby making it

unaffordable. Still, there are some countries like Italy, Norway, Portugal, Sweden,

Malaysia, Philippines, Argentina and Mexico where there is no terror pool or

government participation in terror coverage.

7.2. Difficulty in Insuring Terrorism Risk

From an insurance viewpoint, terrorism risk is very different from the kind

of risks typically insured. To be readily insurable, risks have to have certain

characteristics.

The risk must be measurable. Insurers must be able to determine the possible

or probable number of events (frequency) likely to result in claims and the

maximum size or cost (severity) of these events. For example, insurers know from

experience about how many car crashes to expect per 100,000 miles driven for any

geographic area and what these crashes are likely to cost. As a result they can

charge a premium equal to the risk they are assuming in issuing an auto insurance

policy

A large number of people or businesses must be exposed to the risk of loss

but only a few must actually experience one so that the premiums of those that do

not file claims can fund the losses of those who do. Losses must be random as

regards time , location and magnitude.



In so far as acts of terrorism are intentional, terrorism risk doesn't have these

characteristics. In addition, no one knows what the worst case scenario might be.

There have been very few terrorist attacks, so there is little data on which to base

estimates of future losses, either in terms of frequency—the number of attacks per

year—or the size of the losses, known in insurance jargon as severity. Terrorism

losses are also likely to be concentrated geographically, since terrorism is usually

targeted to produce a significant economic or psychological impact. This leads to a

situation known in the insurance industry as adverse selection, where only the

people most at risk purchase coverage, the same people who are likely to file

claims. Moreover, terrorism losses are never random. They are carefully planned

and often coordinated.



RECENT CASES OF TERRORISM INSURANCE IN INDIA

About Taj & Oberoi

The material cost of the terror attacks on Mumbai's Taj and Trident Oberoi

hotels has been a mystery till now. Insurance value, costs, and losses are all guess

estimates, with different figures trying to explain exactly how much the damage

will cost to repair.

Even as appraisers try and quantify the losses at

the Taj and Trident-Oberoi, terror insurance is now on

the mind of many a business entity. Coverage under

terror insurance can be accorded for loss of or damage

to property, and also for losses on account of

consequential business interruption.

The General Insurance Company (GIC) has a pool of Rs1, 200 crore to

manage, mandated by the Insurance Regulatory and Development Authority

(IRDA).

Media reports suggest that the Taj Hotel was insured for over Rs1, 000

crore, being one of 2.5 lakhs companies or institutions covered by terror insurance

from the pool. They also suggested that till now, claims totaled just around Rs15



crore. Terror insurance coverage is usually on the re-insurer's terms and premiums,

which vary according to an analysis and perception of the proposed risk.

Following the terror attacks on Mumbai hotels, premiums for terror

insurance policies are set to escalate, reports said. IRDA officials are reported to

have met in Hyderabad to thrash out the details about revising insurance rates for

providing terrorism cover.

Insurance officials fear that if the spate of terror attacks continues unabated

as they have this year, the pool of Rs1, 200-crore could be wiped out within the

next few occurrences. Around 12 public and private sector insurance companies

that provide terrorism insurance cover as an add-on cover to the regular fire

insurance policy.

Premiums for terrorism cover were around Rs0.21 per Rs1, 000 of the total

sum insured, and would most likely be revised soon in the wake of the Mumbai

attacks. Reports suggest that premiums could go up by 50 per cent or more, and the

IRDA was reported to being urged to consider approving a proposal that will allow

terrorism cover to be sold as a stand-alone policy. Other reports estimated the total

losses at the Taj and Trident-Oberoi hotels at around Rs800 crore, with estimates

of annual premiums paid by establishments across the city to cover against

terrorism at around Rs50-60 crore.



ATTACKS IN MUMBAI HIKE DEMAND FOR TERRORISM COVER

Terrorist attacks in Mumbai have caused a rise in demand for terrorism

cover in demand for terrorism cover in India as corporate and individual

businessmen take no chances and insure their lives and properties against such

attacks, which have increasingly befallen the country.

Insurance companies, however, feel that the increased demand will neither

change the way terrorism insurance is sold in the country, nor drive the premium to

go up. They currently market terrorism insurance along with personal accident and

fire insurance covers. The common terrorism pool set up by Indian insures has

over Rs.1000cr ($201.7million) as a result of which insures are not expected to

demand additional premium from policyholders for protection against terrorism.

Any claim to be paid for terrorist attack is provided by the pool. Basic life

insurance policies do not exclude death due to such attacks. But additional riders or

add-on covers such as hospitalization and critical illness exclude loss of life

resulting from war, hostilities or terrorist attacks.



PROPERTY LOSS IN MUMBAI COULD HIT $600 MILLION

Insured property claims arising from the terror attacks in Mumbai could

reach $600million, which is equivalent to Rs.29.5 billion, according reinsurance

brokerage, Guy Carpenter. Apart from property insurance claims, insurers face

claims for loss of business, lives lost and public liability.

Sites that were hit included two luxury establishments the Taj Mahal Hotel

and Oberoi Hotel along with the Leopold Café, Chhatrapati Shivaji railway station,

Cama Hospital and the Nariman House Jewish Center. These locations were badly

damage by explosions, fire and gun battles. One estimates places the total property

losses incurred by the total property losses incurred by the two hotels alone at up to

Rs.8 billion. While the Taj is insured by Tata AIG, the Trident- Oberoi Hotels are

insured by state owned New India Assurance. Both insurers appointed assessors to

survey the extent of the damage and estimate claims. Owners of the Taj have said

that the insurance policy they had bought was sufficient to cover the losses.

Besides, the cost of reconstructing the damage properties, it is understood

that insurers will also have to compensate the owners for loss of business. Primal

Shah, property insurance surveyor said, “The loss from interruption of business for

Taj is expected to be in the range of Rs. 300 crore. The loss for Trident –Oberoi is

estimated to be around Rs.50-75 crore for three months.”



INDIA’S TERROR INSURANCE POLL SUFFICIENT TO COVER CLAIMS

India’s terrorism risk pool, standing at about Rs. 13 billion, would be arising

from the Mumbai attacks, according to Indian media reports citing a senior official

of the General Insurance Corporation of India (GIC), which manages the fund. As

the huge terror payouts are likely to deplete the pool, however, insurers are

expected to pump in additional funds to replenish it. So far, no estimate has been

made of the replenishment amount. The GIC official said that if the claims were on

the high side, then there would be a need to increase the premium for terror cover

to replenish the pool. The Insurance Regulatory and Developments Authority’s

(IRDA) approval will be required to increase the pool premium. IRDA expects the

industry to create new and innovation policies to provide cover against terror

attacks, J Hari Narayan, IRDA Chairman, speaking at a business seminar ,said

“Terror insurance products are bound to be upgraded and the rate of premium

might change depending upon the evolution of new products that the industry may

come up with.” He further said that in view of more entities opting in the common

terror insurance pool could go up.



STEPS TO CHOOSE AN EFFECTIVE

TERRORISM INSURANCE POLICY

Step1

Request the upper financial thresholds to provide

information on the terrorist insurance claims through a provider. Companies set a

limit to individual incidents and the maximum number of pay outs over the life of

your policy. You should opt for a plan with higher individual pay outs unless you

work in a high-risk environment.

Step2

Determine the monthly premiums offered by a potential provider. Higher

premiums do not necessarily mean greater insurance pay outs for incidents. Your

company needs to balance out your deductible, premiums and other financial

information to avoid paying out excessive money for a terrorism insurance policy.

Step3

Locate an insurance provider that specializes in risk management and terrorist

insurance. There are only a few of these companies worldwide but their

international holdings allow them to protect your business assets without charging

exorbitant premiums.


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Step4

Research should be done through online reviews and trade publications to

determine the reputation of an insurance provider. Providers with a strong

reputation for service and a portfolio of significant corporate clients are ideal when

protecting your company.

Step5

Read through all materials made available by an insurance company to find

specific definitions of terrorism and coverage of such acts. A provider that claims

to protect your business against biological and chemical attacks must have these

protections spelled out to avoid confusion if an insurance claim is filed.

Step6

Learn about potentially drastic changes in terrorism risk insurance before you

select a policy. The United States Congress has been debating the renewal of the

Terrorism Risk Insurance Act (TRIA) which dictates terrorism risk insurance

policy throughout the country. Insurance providers like Marsh offer regular reports

on the potential effects of TRIA to policy holders.



CONCLUSION

Terrorism is a new risk posing challenge for the insurance industry.

Insurance is envisaged as a way of spreading risk and reducing the likelihood and

potential losses from an untoward event. This turn tenders social and economic

continuity to the country in the event of a national catastrophe.

Following the incidents of September 11, private insurance firms suspended

their terrorism insurance coverage and request for government intervention in the

terrorism insurance market. Today, there is a need for a public-private partnership

to address this issue with well-defined respective roles in crafting and refining the

risk management facilities and systems. The government must carry on to be a

valued partner to the insurance industry and this would allow public universal

business interests to persist with confidence regardless of the impulsive and

catastrophic nature of terrorism risks.

The need of the hour is new financial tools for handling large-scale risks.

Tools such as catastrophe bonds, options, and other instruments to help hedge and

spread the risks of natural disasters are already available. Similar tools are likely to

be useful in the terrorism insurance market also.

Once better tools for assessing terrorism risks and new risk management

instruments to spread and manage them are available, the insurance industry the

world over would definitely assume a greater role in insuring against terrorist



attacks. Terrorism insurance definitely provides a measure of certainty in an

uncertain and perilous world.

Bibliography

Websites:

www. IRDA.org.com

www.TRIA.org.com

www.TRIEA.org.com

www.TRIREA.org.com

www.wekipedia.com

Books:

Insurance Chronicle Magazine

(January & February edition)

Articles from Economic Times


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Presentations & Public Speaking

terrorism terrorism

acts of terrorism

domestic terrorism

word terrorism

concept of terrorism

term act of terrorism

agreed definition of

violent act