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Written by Peter Davy
The November attacks in France’s capital demonstrated the changing profile of terrorism risk in Europe. But, Peter Davy says the lack of large property-related losses does not make it any easier for businesses to deal with terrorism risks
The Paris attacks in November that killed 130 people were the deadliest to hit the country since the Second World War. For Europe as a whole, they were the worst since the Madrid train bombings in 2004. Both the scale of and methods were shocking, with the shootings supplemented by four suicide bombings. Police raids on suspects the following day brought another.
“The scale of the attacks and the organisation demonstrated by this group is something that has surprised not just underwriters but also the security agencies,” says Srdjan Todorovic, head of terrorism for Allianz Global Corporate & Specialty in London.
Yet, as Todorovic points out, the attacks were in other ways far from unprecedented. After all, the year started with the earlier attacks on Charlie Hebdo and kosher supermarket in Paris.
“You would be hard pressed to find an underwriter who didn’t envisage this type of attack within Europe or the West,” he says.
This is partly why there has been little impact on insurers’ appetite to cover terrorism risk in Europe.
“We haven’t seen a large-scale increase in ratings, despite what may be perceived as an increase in potential activity, whether lone wolf incidents or better orchestrated attacks like we’ve seen in France,” says Jelle Ouwehand, vice-president of Marsh’s War, Terrorism and Political Violence division.
Mostly, however, it is because financial losses are limited. In Paris itself, businesses are supported by Gareat – the French terrorism pool that serves a similar function to the UK’s Pool Re. However, the losses from recent attacks are such that the private market alone could probably cover them. In contrast to bombing campaigns such as the IRA’s in the mid-1990s targeting revenue generation in the City or attacks on infrastructure seen elsewhere, people, not property are the targets.
“First and foremost you are looking at human casualties, which is tragic but has very little bearing on a market that covers physical damage,” says Ouwehand.
The changing risk
Nevertheless, the significance of the attacks for both insurance buyers and risk management should not be dismissed. First, the attacks are another sign of the long-feared expansion of ISIS outside the Middle East.
“This time last year ISIS was relatively contained within the territories where it had strongholds, such as Syria, Iraq and Libya,” points out Tariq Al-Salihi, head of war and terrorism at Lloyd’s underwriter Advent. Now, as well as Paris, attacks in the last quarter of 2015 include the Ankara bombings in Turkey, shootings in California and London underground stabbing.
Insurance losses may be low but frequency is high. “In terms of the number of events it is increasing quite rapidly,” says Al-Salihi.
Moreover, the suicide attacks represent a significant departure in mainland Europe, according to Jonathan Wood at consultancy Control Risks.
“Those were the first suicide bombings in a very long time and they indicated an increased level of sophistication,” he says. While large-scale bombing is still unlikely in Europe, assessments will be revised in light of the revelation of a bomb manufacturing capability on the continent, he adds.
Added to this, the nature of recent attacks do not mean ISIS – and others – have no interest in the large, high-profile targets that were seen to dominate the terrorism threat after the 9/11 attack on the World Trade Center. It is simply that smaller attacks, for now, are more likely to be successful.
“Lone wolf [attacks] are much more difficult to disrupt, but that does not mean if a terrorism organisation were able to carry out a larger attack they would not do so,” says Steve Coates, chief underwriting officer of Pool Re.
Even with the prevailing methods, the potential for property damage has been demonstrated in the past. The 2013 mass shooting at the Westgate shopping mall in Kenya, for example, was another attack aimed primarily at killing civilians. Nevertheless, the attack, and the security forces’ response to it, led to insurance losses equivalent to more than US$113 million, according to reports – one-third of the industry’s total annual claims for the country.
“It was an enormous loss to the market,” says Tim Davies, head of sabotage and terrorism, at Canopius. “It shows you can have attacks that are mainly aimed at people but where the resultant damage is still considerable.”
In fact, the recent terrorist attacks point less to a reduction in the risk of losses than an expansion in the potential sources of loss.
As Scott Bolton, director of business development at Aon Crisis Management, puts it: “What Paris has shown us is not that the threat to your property has lessened, but rather that when you look at potential attacks there are additional impacts to think about in terms of risk transfer and mitigation.”
Perhaps most obviously, the targeting of individuals in public venues raises the potential for liabilities – with events organisers and venues, as well as hospitality sectors particularly at risk. Davies says there has already been a significant increase in interest in terrorism liability cover. Importantly, it indemnifies not just against any successful claims, but also the costs of defence.
“If something does happen in a sports stadium, for example, you could well get a class-action claim, and the costs of defending that would be huge even if the liability was not proven,” says Davies. Likewise, the lockdown of Brussels and cancellation of the Germany vs Netherlands football game in Hanover have bolstered the case for terrorism extensions to contingency insurance to protect against event cancellations.
More widely, Paris and its aftermath showed the potential for significant impacts on any type of business.
First, it reinforced the message that it is no longer just high-profile businesses that are potential targets. Independent cafes and bars, as well as crowded places such as national stadiums, are potential targets – and, empirically, such businesses are
much less likely to purchase cover for terrorism.
“In France, once a business buys a property the insurance coverage for terrorism is automatically given through GAREAT. In the UK and elsewhere it’s not necessarily the case, so businesses need to plan for this eventuality and buy affirmative terrorism policies” says Todorovic.
“The number of SMEs that either don’t have business interruption cover or that don’t buy terrorism insurance at all is problematic,” explains Pool Re’s Coates.
Second, there is potential for widespread disruption to businesses even where they are not directly affected. That was most obvious looking at Brussels, where schools and the metro, as well as many shopping malls, museums, cinemas and restaurants, closed during the four-day lockdown. The cost to businesses was estimated at €29.7 million a day by Belgian television programme The Free Market.
The right cover
Even when small businesses can be persuaded to consider cover, the risks they face are not always easy to anticipate or to insure. This is because, while the threats may have evolved beyond attacks aimed at property damage, the cover sometimes has not. Declining premium rates have gone hand in hand with a commodisation of the product, according to Kade Spears, head of specialty at The Channel Syndicate. This is largely good news for businesses, with standard policy wordings making cheap cover widely available. However, standard policies may also include important exclusions.
“Don’t focus just on price,” Spears warns. “There’s a host of things you ought to be thinking about before just taking the commoditised product." Most significantly, cover remains tied to physical losses. It will therefore cover for property damage directly related to a terrorist attack and the business interruption resulting from that. Losses caused by denial of access due to an attack on a nearby property (if police cordon off the area, for example) may not be covered, however. Likewise, there’s little cover in the market for losses caused by threats or hoaxes.
All businesses therefore need to look at all the potential risks, and then see the extent to which the insurance can cover them, and if it’s needed.
As Bolton says: “The conversation around terrorism can often begin and end with property damage business interruption coverage, but we need to be more articulate. Ultimately it starts with how I may exposed; what the potential impacts are; and whether I have everything in place to respond appropriately – both mitigation and insurance.”
This article was published in the January 2016 issue of CIR Magazine.
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