Magazine article Risk Management

Insuring against Terrorism

Magazine article Risk Management

Insuring against Terrorism

Article excerpt

Concerns about political unrest and terrorism continue to be high on the agenda for risk managers of multinational businesses. According to the 2017 Allianz Risk Barometer, these fears ranked eighth among the top corporate perils cited by risk consultants, underwriters, senior managers and claims experts. The most commonly cited concerns were acts of terrorism and sabotage (54%), impact on supply chain (42%), protectionism or government intervention (31%), sanctions (24%) and a state crisis (23%), such as Brexit or a breakdown of the eurozone.

Supply chain impacts from terrorism can quickly become complicated, extending to a company's internal suppliers or third parties, which could produce an interdependency and/or contingent business interruption scenario. If the insured is a manufacturer relying on a small number of suppliers or customers, for example, terrorism contingency plans should be in place as it can take months for an affected company to get back to regular operations.

While conventional terrorism is a real concern, the growing risk of political violence events, such as strikes, riots and civil commotion (SRCC) and, in extreme cases, rebellion, insurrection and war, should not be underestimated. In fact, in many countries, the likelihood and impact of these types of incidents on businesses are much greater and longer-lasting than with terrorism-related events.

POLITICAL RISK VS. POLITICAL VIOLENCE

There is often confusion about the difference between political risk and political violence. Political risk is the risk that an investment will suffer because of political changes or instability in a country. This could stem from a change in government, legislative bodies, foreign policy or military control. Political risks can also result in nationalization and expropriation of assets. Insurance for these scenarios can be obtained with other political risk coverages such as confiscation, expropriation, nationalization and deprivation coverage (CEND), contract frustration, or trade credit insurance.

In contrast, political violence coverage relates to events such as terrorism, SRCC, war and warlike perils (which include rebellion and coups d'état), and is often linked back to the damage to property of an insured. These types of incidents occur on a daily basis around the world and can have a significant impact on businesses and their ability to trade.

DOMESTIC TERRORISM RISKS

Risk managers of large U.S. companies know that safeguarding assets from domestic terrorist acts is considerably different than addressing similar risks internationally. From a domestic perspective, the greatest terrorism risk stems from incidents in which a lone wolf assailant targets people in a populated area using firearms, vehicles or a combination of both. Such attacks are increasing: According to the FBI, an average of 11.4 active shooter incidents took place in the United States annually between 2000 and 2013, 70% of which occurred in either a business or educational environment.

Active shooter insurance can help mitigate this risk, providing coverage for services both before and after an active shooter incident, including recovery from physical and emotional harm or potential loss of life. Extensions to this coverage can also provide a level of business interruption indemnity as well as protection against lawsuits that could result from allegations of negligence in failing to prevent an attack.

A more general type of domestic terrorism insurance is available through the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2015. TRIPRA allows companies to obtain terrorism coverage through their property insurance for events that are of a specified type and magnitude. Once an act of terrorism has been officially certified by the secretary of the treasury, in consultation with the attorney general and secretary of homeland security, compensation under the program is then subject to a number of additional triggers, including a specific amount of insured aggregate losses during a calendar year. …

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