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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 noncombatants.
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
of acts of terrorism themselves and their motives. There is disagreement on
definitions of terrorism.
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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.
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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.
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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
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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)
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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
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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.
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RISK OF DYING
Smoking 10 cigarettes a day
All natural causes age 40
Road accident
Playing soccer
Homicide
Terrorism attack in 2001
Hit by lightning
Terrorism attack in 1990s
One in 200
One in 850
One in 8,000
One in 25,000
One in 100,000
One in 100,000
One in 10,000,000
One in 50,000,000
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.
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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
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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 countrys
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.
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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.
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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
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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.
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CHAPTER NO. 5
TRIA,
TRIEA
AND
TRIREA
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.
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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 dont insure the kind of
business the bill was primarily designed to cover, such as large commercial
buildings and construction projects. State Farms commercial business is focused
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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
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AND
EXTENSION
ACT)
At a time when the sunset clause for TRIEA was due shortly (on January
1,2008), there has been less vocal debateunlike beforeon 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.2671The 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:
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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 governments 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
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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 crosssubsidization 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 governments purpose not to crowd out private insurance,
but only to give it time to stabilize itself.
Period
Coverage
December 2014
2005
Most commercial
Many P&C
Many P&C
business
business, foreign
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covered by
owners multiperil,
National Flood
commercial auto,
Insurance, life,
Trigger
medical
The event is
US $5 million until
US $100 million
certified as an act
of terrorism after
US $5 million in
insured losses
2007
until further
notification
US $100 million in
Deductible
2007
17.5% (2005-2006)
to 2005)
20% (2007)
of insurer
deductible at 20%
of direct earned
premium for
insured terrorism
Federal
reinsurance
90%
90% (2005-2006)
losses
Retain current level
85% (2007)
of 85% federal
reinsurance and
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5.5. DEVELOPMENTS
Payment of TRIA Losses Above $100 Billion: President Bush signed a longterm 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 governments
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 policyholders 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
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Australia
2.
Austria
3.
Finland
4.
France
5.
Germany
6.
Israel
7.
Namibia
8.
Netherlands
9.
Russia
10.
South Africa
11.
Spain
12.
Switzerland
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Turkey
14.
United Kingdom
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
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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.
SWITZERLAND: Beginning in 2003, insurers can cede all property risk insured for
a sum above a certain amount to a reinsurance facility.
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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.
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.
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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
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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 frequencythe number of attacks per
yearor 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.
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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.
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STEPS
TO
CHOOSE
AN
EFFECTIVE
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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.
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Bibliography
Websites:
www. IRDA.org.com
www.TRIA.org.com
www.TRIEA.org.com
www.TRIREA.org.com
www.wekipedia.com
Books:
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