final year project
TRANSCRIPT
A Study of the Consequences That 9/11 had on the Insurance Industry in the US and
the UK.
Name: Niall Madden
Student Number: 09006087
Bachelor of Arts in International Insurance and European Studies
Supervisor: Robert Ford
Date of Submission: 06/03/2015
Final Year Project report submitted to the University of Limerick, March 2015
Bachelor of Arts in International Insurance and European Studies
Submitted to the University of Limerick, March 2015
Name: Niall Madden
Student Number: 09006087
A Study of the Consequences That 9/11 had on the Insurance Industry in the US and
the UK.
Word count: 11143
Supervisor: Robert Ford
This project is solely the work of the author and is submitted in partial fulfilment of the
requirements of the Degree of Bachelor of Arts in International Insurance and
European Studies
Abstract
On September 11th 2001, an event occurred that changed mankind forever.
When people hear about 9/11, they immediately think of the devastation and
damage that was caused but this was viewed very differently by the insurance
industry. The UK and the US insurance markets were very powerful entities at
the time of the attack and the evolution of their industries was very
comprehensive as terrorism risk made itself known to the world. Both markets
took somewhat different tracks in their methods to provide future protection
against terrorist attacks. The US enhanced its scopes of cover and changed its
definitions of what exactly an act of terrorism was while the UK who had, at
the time, the premature Pool Re scheme in place was willing to allow the
financial protection from the British Government. The UK also greatly
improved the securitisation of Britain as they looked to stop attacks at the
source and have insurers in place as a willing back up. The US were not as
lenient with how much participation they wanted their Government to have but
were willing to accept some help in a time of adversity. In the space of just
over twenty years, the evolution of the insurance company has been
tremendous and terrorists are finding more and more blockades in place
against them to stop a foreboding future attack. The one hundred and two
minutes it took to cripple an iconic landmark enhanced the insurance industry
worldwide for the better.
Table of Contents
Chapter 1 Introduction ............................................................................................... 1
1.1 The One Hundred and Two Minutes That Changed Insurance ............................ 1
1.2 The Need for Adaptation ........................................................................................... 2
1.3 Problems with Terrorism Risk .................................................................................. 3
Chapter 2 The Insurance Market of the USA........................................................... 5
2.1 US Market Pre-9/11 .................................................................................................... 5
2.2 Tallying the attack ...................................................................................................... 6
2.3 Capacity to survive? ................................................................................................... 7
2.4 Change immediately after anguish ........................................................................... 8
2.5 Beginning the Insurance War against Terrorism .................................................... 9
2.6 Homeland Security ................................................................................................... 12
2.7 TRIA, TRIEA and TRIPRA .................................................................................... 14
Chapter 3 The Insurance Market of the UK........................................................... 18
3.1 Pre-9/11 in the UK .................................................................................................... 18
3.2 Establishment of Pool Re Scheme ........................................................................... 19
3.3 UK reaction to September 11th 2001 ....................................................................... 20
3.4 Expansion of cover ................................................................................................... 22
3.5 Expansion of Pool Re in 2002 .................................................................................. 24
3.6 The Bombing of London 2005 ................................................................................. 27
3.7 Terrorism Act 2006 .................................................................................................. 28
3.8 Resiliency of the UK ................................................................................................. 30
Chapter 4 Possibilities in the Future ....................................................................... 32
4.1 Time of Great Change .............................................................................................. 32
4.2 Advancements in Future Terrorism Threats ......................................................... 33
4.3 Preparing for the Future .......................................................................................... 34
4.4 Unique Terrorism Insurance ................................................................................... 36
Conclusion .................................................................................................................. 38
Bibliography .............................................................................................................. 40
1
Chapter 1 Introduction
1.1 The One Hundred and Two Minutes That Changed Insurance
Since approximately the year 1965, there has been over ten thousand terrorist
incidents around the world. The UK and the USA have been relatively
terrorism free since before 1993 when the IRA set off bombs in London and
when the twin towers were first attacked in New York. However, these losses
were covered by insurers with relative ease and were not taken as seriously as
they should have been. The UK began to implement measures immediately in
1993 to stop future terrorist attacks but U.S. insurers still continued to cover
terrorism without much concern. “Terrorism was covered de facto in most
commercial insurance contracts” (Kunreuther and Michel- Kerjan, 2002).
However, in the space of only one hundred and two minutes, both insurance
industries lives were changed on the 11th of September 2001. Following this
disastrous occurrence, the insurance and reinsurance industries found a serious
threat to their financial capacity. Before 9/11, it was believed that the insurers
who had clients with big potential risks would be able to meet their obligations
in the event of a loss occurring. However this event in 2001 was unique as
there was no capacity or specific cover in place for this type of event. For
insurance companies, risk is measured through policies with specifications of
risks that will be covered. The insurer has an understanding of possible claims
and their magnitude and is willing to pay fair compensation in the aftermath of
the loss. Nonetheless, this event presented the industry with the unimaginable;
flying enormous planes into one of the world’s most iconic landmarks.
However, the event had somewhat of an advantageous role as it made insurers
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adapt to focus on the possible maximum loss an event could incur. This was
the beginning of a great change in the insurance industry. Although the event
itself was troubling, the evolution it brought to worldwide insurers may prove
highly advantageous for the future.
1.2 The Need for Adaptation
The terrorist attacks of September 11, 2001, began a new dimension for
domestic and international security institutions and government organizations.
It was also the beginning of a complicated time for the insurance industry that
is still seen today. In an article by (Woehr, 2006) he concludes that the events
of that day have prompted insurers to introduce terrorism insurance as a
necessity, assess underwriting risk more accurately with the use of catastrophe
(CAT) modelling and to collaborate with the federal government on 14 major
pieces of legislation, including the Terrorist Risk Insurance Act of 2002. The
incident forced countries to change their decision making on terrorism risk.
The US undertook a somewhat different approach than the UK in protecting
against this complicated risk. The modifications in the US involved a great
change in scopes of cover and the definition of terrorism while the UK, who
had its Pool Re Scheme already in place, focused much more on the
securitisation of Britain. Prior to the incident on the twin towers, the private
insurance sector in the US seemed capable of wielding the potential risk loss
that terrorism could bring on the nation. However after this event these notions
have changed greatly. The industry has had to adapt significantly and
undertake a new approach in its review of its risk acceptance position, while
awareness of terrorism cover and more importantly its plea for protection
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against this threat has surged. Through new pieces of legislation and specific
cover options for terrorism risk, the US and UK in particular, have proved
worthy opponents in the battle against terrorism risk through meaningful
adaptation. Due to this new approach there has been a significant change over
the past number of years in these insurance industries valuation and
assessment of terrorism insurance, as well as the provisions to provide
protection against unfathomable risks. The industry has learned from past
incidents and adapted in kind.
1.3 Problems with Terrorism Risk
Terrorism is problematic in terms of its classification and meaning, as is not as
easily defined as an act of violence, battery or even war. As with any risk an
insurer is willing to take on, the insurance industry, its policyholders and
underwriters have to agree on a definite loss event and understand its unknown
consequences. The sheer size of the probable developments and the strain of
assessing their probability are yet another troubling obstacle seen in the US
and the UK after 9/11. In the direct aftermath of the 11th of September 2001,
insurers found international terrorism to be basically uninsurable and
inconsistent. They made a decision to only offer restrictive cover and also
raised premium prices to cover its unpredictability. Catastrophe risks such as
previous natural disasters helped the insurance industry in some ways as it had
some similarities in its puzzling risk levels. In both risk scenarios there are
massive potentials of loss and this makes their classification difficult to
determine. The accumulation of all these exposure areas can not only test the
insurance sector but also a nation’s financial capacity. This is why terrorism
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risk differs greatly to natural disasters as the probabilities and consequences of
natural hazards can be studied and in some ways prepared for due to
previously recorded data. It is far more difficult to prepare for terrorism risk as
it is a premature and unpredictable entity and can occur anytime and anywhere
without warning. The UK and the US industries have provided many
necessary provisions to stop terrorism risks but as we progress into the future,
more threats will arrive which insurers must provide protection against.
5
Chapter 2 The Insurance Market of the USA
2.1 US Market Pre-9/11
“Since the early days of the “war on terror,” the insurance industry has had an
instrumental role and “underwriting terrorism” has become part of the global
governmentality of terrorism” (Aradau, 2012). Before the attacks of September
11th, 2001, insurers generally did not charge for or specifically exclude terrorism
coverage to customers seeking security. There was effectively no price for
terrorism in policies and terrorism cover was implied within a standard property
and reinsurance policies. In the 14 years since, we have seen catastrophe
modelling emerge for terrorism risk, with efforts to price it, and the general
exclusion of terrorism from property insurance contracts in the US and also
some other parts of the world. Many people believe that 9/11 was the first
serious scenario of terrorism in the USA but they are mistaken. On February
26th 1993, a bomb that was attached to a truck was detonated below the North
Tower of the World Trade Centre. There were six people killed in this attack
with over a thousand left injured. Although there was a huge difference in the
magnitude of the attacks, this bombing is somewhat of an unheard entity when
compared to 9/11’s devastation. This attack, however did make the US more
aware of how unprepared they were for a terrorist attack and certain provisions
were made. In the aftermath of the bombing and the hectic evacuation that
ensued, the World Trade Centre and also many of the buildings around it
revamped their emergency protocols, particularly with regard to what would be
the quickest evacuation possible out of the towers. These practices were carried
out during the September 11th attack but were not as well adhered to as they
could have been. After this attack, there was much speculation on whether the
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twin towers should take out specific terrorist coverage on the towers but they
already had some protection in place as the insurers paid out over $500 million
from damages. There were no special provisions made in the US after this attack
as insurance companies did not believe that international terrorism or terrorism
on a domestic scale should be categorised separately by itself when the price of
a commercial insurance policy was being calculated. This is primarily because
losses and damages from terrorism had historically been miniscule and
inconsistent. Therefore prior to September 11, 2001, terrorism coverage in the
United States was realistically an unnamed peril that would be covered in most
standard all risk commercial and property owner’s policies that had coverage on
damage to property and its contents.
2.2 Tallying the attack
The attack on the World Trade Centres in 2001 resulted in insured losses being
larger than any disaster, manmade or natural, in history. Even estimating a loss
figure is difficult due to all the different areas affected. Putting a value on the
number of lives lost, property damage and the loss in the manufacturing and
distribution of goods and services, figures were already highly substantial.
When you single out certain aspects of the losses that occurred, a better picture
can be seen on the enormity of the loss. In just under two hours, over three
thousand people were killed with thousands more also injured. The destruction
of the four Boeing aircrafts used in the attacks were valued at $385 million. The
destruction of the World Trade Centre and also damages to buildings in the
vicinity were valued with a replacement cost from around $3.5 billion to $4.5
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billion. The plane that crashed into the Pentagon caused up to $1 billion in
damage to the buildings structure and its repair. The amount of job losses that
occurred amounted to an estimated eighty-four thousand with almost $16 billion
in lost salaries. And finally, the cost to clean up all the rubble and debris in the
aftermath was estimated to have cost at least $1.4 billion. When these figures
are added up, it is clear to see how 9/11 changed the Insurance industry forever.
However, if you delve deeper and include the loss that the stock market took,
the price tag approaches $2 trillion. The US markets, had to change their
procedures in dealing with terrorism so if there ever was another attack, the
industry would be ready to deal with it immediately.
2.3 Capacity to survive?
In less than two hours the World Trade Centres were left in ruins and the
insurance industry wondered could it be joining the wreckage. This is due to the
fact, as mentioned, that the extent of the damage done and lives lost was
incomprehensible. Insurers would be expected to provide backup to millions of
people to help soften the horrendous blow they had just suffered. It is an
insurer’s job to provide financial security in the face of adversity. At the moment
the towers had fallen, the industry’s most persistent issue was the fact that they
must assure policyholders, investors and shareholders that they had the capacity
to meet their responsibilities due to the fact that thousands of sufferers were
going to have their policies come into effect and try find some sort of
reimbursement after the loss. Did the insurance industry have the resources
available to help? “The industry was able to successfully allay those fears by
issuing press releases through major trade associations, postings to web sites
8
and direct contact. Within 48 hours of the attacks, virtually all doubts were
erased” according to (Liedtke and Courbage, 2002). This was a highly
significant moment for the industry as right after the attack it had the capacity
to deal with this horrendous incident and it gave shareholders and investors more
confidence and reassurance. The public were also relieved as they received
much needed support during a very difficult time. The capacity of insurers in
the US market is seen to have survived due to one main factor, the spread of risk
among insurers. This diffusion of risk was already being used in the UK markets
before 9/11 and is somewhat similar to their Pool Re system which will be
discussed later. Without the use of reinsurance companies, 9/11 would have
crippled the industry. Reinsurance suffered the heaviest losses of the attack with
Lloyds and Swiss Re amassing the largest burdens. By early 2002, insurers had
excluded terrorism from their policies in almost 45 states. “Commercial
enterprises thus found themselves in a very difficult situation, with insurance
capacity extremely limited and, when offered, very highly priced” (Michel-
Kerjan, 2012)
2.4 Change immediately after anguish
Insurers warned that another event with the comparable magnitude of 9/11
would do irretrievable harm to the industry. Furthermore, they proclaimed that
the uncertainties surrounding terrorism risk were very significant and that it can
be seen as “an uninsurable risk” (Kunreuther and Michel-Kerjan, 2004). This
led the insurers, reinsurers and also the national government to hold meetings to
discuss what could be done in the future to try to have some form of protection
in place in the face of adversity. With terrorism’s foreboding nature, there must
9
always be some form of defence, in insurance terms, to help an economy and its
people recover as quickly and freely as possible. 9/11 made insurers alter their
now outdated policies and specify the gritty details of what would and what
would not be covered when people sought insurance policies. In October 2001,
the Insurance Services Office which was acting as the face of all the insurance
companies in the US at that time, filed for a motion that every state must give
permission to their insurance companies to exclude terrorism from all
commercial insurance coverage. This request was clearly due to the fact that
insurers believed they could not deal financially with another onslaught from
terrorists as the industry and the economy would be hit horrifically in another
attack and such an event could be imminent. At the end of February 2002, there
were forty-five states which permitted insurance companies to exclude terrorism
cover from their policies. There was an exception to this however as
compensation for workers’ insurance policies that would cover work-related
injuries without regard to the peril that caused the injury would not be excluded.
With that clause as the only omission, by September 11, 2002, an exact year
after, “very few firms had other insurance coverage against a terrorist attack”
(Hale, 2002). This was mainly due to fear over how much the insurance
industry’s capacity could be stretched.
2.5 Beginning the Insurance War against Terrorism
The United States of America’s insurance industry needed an immediate change
as people and businesses could not live in fear of terrorism destroying their daily
routines and livelihoods. After the “terrorist attacks that destroyed America's
sense of security and invincibility, the government under President George W.
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Bush launched the Global War on Terrorism—which has become the longest
period of continuous war in U.S. history.” This quote from (Rowen, 2007)
highlighted for me that there may possibly be no end to a war on terrorism risk
for insurance industries as its irregular nature is unfathomable. The series of
laws and acts that followed the war against terrorism has changed our everyday
lives and also that of the insurance industry. It began originally in America
where there was a great need for a sense of national security in a place that was
shattered by tragedy. With insurance companies crippled in worry over another
attack there was a great need for a plan or strategy to be implemented in a bid
to fight the war against terrorism from an insurance point of view. There were a
huge number of acts, rules and procedures implemented immediately after the
twin towers fell but there were three main acts introduced that served as the
building blocks to an effective battle against terrorism for the USA. On October
26th 2001, George W. Bush signed the USA PATRIOT Act into law. Its title is
seen as an acronym which spells out Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001. This law generally expanded the many different definitions of
terrorism, it provided more prolonged and harsher sentences for convicted
terrorists, and it also made it much easier for the law administration and
intelligence agencies to collect information and they were allowed share it if
they deemed it to be of a suspicious nature. This Act was brought in a mere
forty-five days after the incident and according to (Brill, 2003) the version of
the USA PATRIOT Act voted on by Congress was not the actual bill that was
approved in committee and that had been endorsed by the American Civil
Liberties Union. It was speculated that many members of Congress at the time
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briefly read over it and some just voted in its favour blindly. This was mainly
done in panic as the fear that something urgent must be done forced people into
acceptance. The Act provided law enforcement officials with substantial new
powers to undertake searches without any warrants and also track everybody in
the US’s banking connections. The Act also provided the obligatory right to
detain and deport, in secret, individuals that were believed to be suspected of
committing terrorist acts. The specified purpose of the USA PATRIOT Act was:
"To deter and punish terrorist acts in the United States and around the world, to
enhance law enforcement investigatory tools, and for other purposes”
(Department if Government and Justice Studies, 2006). It is these “other
purposes” that had the general public worried but it is also these purposes that
were the key to providing more security for the US. The Act also had a very
secretive nature during its inception, the Justice Department tried not to invade
the general public’s right to freedom as it felt it went against the Americans
constitutional rights. It was recorded that in 2003, there were hundreds of
suspected terrorists throughout the US who had been identified and tracked, with
“nearly 20,000 subpoenas and search warrants issued “(US Department of
Justice, 2003). As time gradually moved on and the US insurance industry was
changing, the PATRIOT Act began to help the nation’s insurers feel more
confident in providing cover for terrorism. As more amendments were made to
this Act, more confidence soon followed. This helped pave the way for new
enterprises for terrorism risk to be set up and this helped ease the woes of many
businesses. As a result of this Act, insurers were more willing to have provisions
for terrorism risks in their policies. These new laws and the reactions to them by
the USA as a whole, presented a meaningful example of the tussle to uphold a
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balance between security (fight against terrorism) and the freedom of
individuals (protection of constitutional rights). Many people were totally
against these new laws such as the USA PATRIOT Act as America began its
war on terror. However, in order for the insurance companies to be confident to
provide protection for citizens, these laws were a necessity. This Act was the
beginning of a great change to insurance in the US and also worldwide.
2.6 Homeland Security
The next piece of legislation that saw a great and worthwhile change to the
insurance industry in the USA was the Homeland Security Act 2002. The Act
was introduced on November 25th 2002, which was just over one year after the
attack of 9/11. The Act brought with it some important pieces of new law to help
the US and in turn, the insurance industry feel more confident in opposing
terrorism and providing cover for it. It included specific provisions including
the offering of new insurance policies with specified terrorism risk to certain air
operators and also new aviation war insurance products became more available
to commercial insurance markets airlines alike. This helped ease the woes of
many commercial property owners as they felt that there was more protection
available for them. This provision was an integral part of how the industry began
to adapt to this new threat. The Homeland Security Act also created the United
States Department of Homeland Security. Likewise it includes many of the
organizations under which the powers of the USA PATRIOT Act are also
exercised. The Dep. Of Homeland is described by (Reese, 2013) as an
organisation that is trying to ensure that the homeland of the US is kept safe,
protected, and robust against terrorism “where American interests, and ways of
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life can thrive to a national effort to prevent terrorist attacks within the United
States” and to also reduce the vulnerability of the U.S. to terrorism, and curtail
damage from attacks that may occur. Without 9/11 this Act would never have
come into existence and therefore the industry in the US would never have had
the advantages and protection that this legislation brought with it. A more recent
amendment has been made to the Homeland Security Act 2002 and was known
as the National Cybersecurity and Critical Infrastructure Protection Act of 2013.
This Act is another prime example of how terrorists are adapting their ways and
therefore the insurance industry must adapt. Terrorists can use the internet and
computer programs to hack people’s privacy and also hack government
databases which contain national security codes, launch codes etc. This
relatively new field of cyber security insurance is designed to ease losses that
may arise from a variation of cyber-attacks, including breaches of data, business
interruption and damages to networks. If a strong cybersecurity insurance
market was consistently adapted and upheld it could help reduce the number of
successful terrorist cyber-attacks in a number of ways. Given their unpredictable
nature, cyber-attacks such as data breaches are difficult to prepare for and cope
with. In a recent article by (Kam, 2013), he presses the argument that “many
organizations have found that cyber insurance helps cope with unexpected
expenses and bear some of the data breach costs”. This article shows the need
that companies and also governments have for cyber insurance as terrorists seek
new ways to launch an attack. Cyber insurance can be viewed as a new and
innovative measure on the part of the insurers which can be seen to have
stemmed from the attack on the World Trade Centre. If insurers, governments
and computer specialists worked in tandem with one another, then the issue of
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cyber terrorism can be handled in an adequate manner. Again 9/11 was seen as
the first real incident of terror and since then the US has adapted itself to combat
terrorism, the fight against cyber terrorism shows just how far the insurance
industry has evolved and what they are prepared to offer in aid against the
unrelenting fight against terrorists.
2.7 TRIA, TRIEA and TRIPRA
The Terrorism Insurance Act 2002 was introduced into the US by President
George W. Bush on November 26th 2002. This was just one day after the
Homeland Security Act was also announced. The fact that these Acts were
signed so closely to one another proves how American markets needed cover in
place against terrorism and insurers were the primary source of such coverage.
The Act simply shared the cost of claims for property and life between the
government in the US and the insurance industry. In the year between 9/11 and
the Acts’ inception, there was an extensive period of debate as to what would
be the most successful form of support and what would be the range of
government participation in the matter. The debate focused on two main
arguments, government loans and coinsurance. The loan was interest free to
insurers but involved some restrictions which would be discussed before
lawsuits in the event of another terrorist attack. The coinsurance idea involved
the notion of a free coinsurance plan where the government would help
reimburse a pre-planned percentage of losses in the first year and then again for
a second year. The sharing of the losses between the government and insurance
industry would prove to be advantageous as the capacity would be available
from insurers for people who had suffered a loss. Again, the evolution of the
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insurance market was seen as the government and the industry had to act in
unison to give commercial property owners much needed security and help. The
impact of 9/11 had changed the thinking process of insurer’s for the future and
realistically it was for the better. The program was originally passed to provide
a provisional measure to help escalate the availability of terrorism risk from
insurers, but the Act has been seen as highly successful and has been renewed
twice since, in 2005 and 2007 and afterward TRIA was extended up to the end
of 2014. It has, fortunately, never been tested as no huge threat has been
presented to the US since 9/11. The Act has created a backup or "backstop" as
was the coined term for insurance claims relating to acts of terrorism. The Act
"provided for a transparent system of shared public and private compensation
for insured losses resulting from acts of terrorism” (Terrorism Risk Insurance
Program, 2015) and also had a legal “make available” requirement that insurers
must offer their customers terrorism cover. It erased the terrorism exclusion that
many insurers and reinsurers had in place. However, the exclusion could be re-
established if the insured had failed to pay the increase in premium for the
coverage or also if the policyholder signed a declaration asking that the
exclusion would be reinstated. Under this new legislation, an incident of
terrorism must also be certified as such by the Secretary of the Treasury and
must meet the criteria that were specified. For example an “act of terrorism” can
be deemed as such if it is a vicious act or an act that puts human life, their
property or business in danger. It is also specified that the damage must have
occurred within America and was committed by somebody who was acting on
behalf of a "foreign person or foreign interest” which as part of an effort to place
the civil population of the United States into harm. This Act was a huge step in
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the changing of the insurance industry as the passing of this Act was of great
benefit to reinsurers especially as a lot of responsibility was put on them since
the financial burden from the 9/11 attacks. In its aftermath, reinsurers were
unsure of ways to precisely assess and offer fair premiums to combat terrorism
exposures. Therefore, many reinsurers immediately withdrew from the market
for terrorism coverage as their capacity was unable to deal with another incident.
This had an adverse effect on primary insurers as with no back up from
reinsurers, they then had to completely exclude terrorism risk. In an article by
(Woodword, 2002) he provides a good argument of how 9/11 and the resulting
changes had adapted the insurance industry for the better. Due to this Act, all
commercial insurers that were writing business for the United States were
required to partake in the Federal program and to offer insurance for terrorism
risks. This was hugely important as it was imperative that cover be ready for
commercial property owners if an unfortunate attack did occur. This Act made
sure that insurers would offer cover and not totally exclude terrorism risks in
their underwriting. The industry did not realise at the time at how successful it
may prove as since there has not been a serious terrorist attack since 9/11, it is
reassuring for the US population to know that protection is in place. TRIA was
intended as “a short term solution to the economic and social impact from the
unavailability of terrorism coverage in U.S risks” according to (OECD, 2005).
In 2005 the Act was amended and reintroduced as although there were terrorist’s
threats to insurance, the US felt that they have enough protection in place to
quell the aftermath of an attack with this Act and its stipulations. However, the
question that was raised on whether or not to renew the Act at the end of 2005
was not as simple as was expected. The reason for the debate concerned the
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issue of how much of a responsibility that the government should have, if any,
in authorising the offer of coverage from the insurance companies and also the
role they should have in providing help for catastrophic losses arising from a
terrorist incident. Ultimately, the amendments were made and the Government
passed the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) in
December 2005. It was an extended and modified version of the previous Act
and would expire at the end of 2007. Most of the changes merged into TRIEA
were made to further distance the government from terrorism losses by means
of “increased retentions for insurers, more stringent criteria for the magnitude
of losses covered, and the greater ability of the program to recoup losses after
payment” (Ball, 2006). Towards, the end of 2007, the Act was again further
extended and on December 26th 2007, the Terrorism Risk Insurance Program
Reauthorization Act (TRIPRA) was introduced. The Act was further updated to
help re-stabilize the insurance market and additionally help the insurance
industry’s confidence in providing terrorism coverage. The amendments that
were made in 2007, were not as substantial as others but perhaps the largest and
most important update was that the Act was extended a further seven years until
the end of 2014. The passing of the Terrorism Risk Insurance Act of 2002, along
with its two extensions, served to “effectively increase market capacity”
(Cogliano, 2011). If TRIA was not extended in the years 2005, 2007 and
subsequently in 2014, then many insurers would have omitted coverage for all
risks associated with terrorism on commercial and aviation policies which in
turn would have left policyholders feeling quite vulnerable and unable to protect
their businesses by not having protection in the face of adversity.
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Chapter 3 The Insurance Market of the UK
3.1 Pre-9/11 in the UK
The UK insurance market when compared with the US market tells somewhat
of a different story in terms of pre 9/11 terrorism cover. While the US had
realistically no cover in place for something like the magnitude of 9/11, the
UK had a specific system in place for such an event. However, only for
previous attacks on the UK insurance industry, they might have been as
unprepared for 9/11 as the US were. There were two incidents that persuaded
the British into changing their stance and having protection in place for
possible future attacks. The first incident was known as the Bombing of the
Baltic Exchange. On 10th April 1992, an attack from the IRA on the
Exchange's offices damaged them extensively and also caused severe damage
to surrounding buildings. There were three fatalities in the attack while over
ninety people suffered injuries. The bomb was deemed to have caused around
£800 million worth of damage which had the potential to cripple the insurance
industry at the time but they had enough capacity to deal with it. Then in 1993,
the next event known as The Bishopsgate bombing occurred on Saturday the
24th April. The IRA or the Provisional Irish Republican Army detonated a
truck in one of London’s major financial districts known as Bishopsgate. In the
incident there was one fatality, journalist Ed Henty, while the bombing injured
over forty people and it was estimated that recovery and reconstruction would
cost somewhere near £350 million. This huge amount included reconstruction
of damage to stations and other surrounding buildings and also the complete
renovation of St. Ethelburga's church. The subsequent pay-outs by insurance
19
companies resulted in them suffering heavy losses “causing a crisis in the
industry, including the near-collapse of the Lloyd’s of London market”
(Dillon, 1996). These incidents can be noted as the beginning of a great change
for the UK insurance market. 9/11 further changed the UK’s stance against
terrorism but these incidents can be seen as terrorisms first major contribution
to the attitude of the British insurance industry. Insurers knew that it was time
for a change and together with the UK Government they came up with an idea
to provide greater capacity and assistance to the industry.
3.2 Establishment of Pool Re Scheme
After the incidents in 1992 and 1993, The Pool Reinsurance Company Limited
was set up. "Pool Re" was the British Government's 1993 response to the
withdrawal of reinsurance cover of the UK market for terrorist attacks,
following the IRA bombing of the Baltic Exchange in 1992 according to
(Thomann, 2004). Pool Re can be seen as a joint insurer that was set up by the
British Government along with main insurers across the UK. What it
essentially did was to use “Her Majesty’s Treasury” also known as the
Exchequer as a last resort if their capacity was going to be tested to its limits.
Many of the different insurance companies around the UK have the right to
use the Pool Reinsurance Company. The UK Government offers limitless
reinsurance to the Pool Re Scheme, which is beneficial in the protection of its
capacity if all of its financial resources are drained following a series of large
claims. Pool Re is also funded by insurers, who pay premiums to the Pool. In
the event of a high number of claims, Pool Re will reimburse these insurers
once the level of their insurance portfolios are determined. This proved very
20
beneficial as substantial reserves were now in place for all UK insurers. This
company meant that the UK was in much better position to deal with acts of
terrorism than most countries around the world at that time. It was by no
means a perfect system at its inception but it was a worthwhile start at
combatting incidents that can cripple financial securities in a matter of
moments. When it was first established the Pool Re scheme only provided
reinsurance cover for an incident of terrorism that caused damage by fire or
explosions where the UK government would assist insurers by allocating
capital to them to pay out on claims if the insurance industries assets were
fatigued. Between 1993 and 2002 Pool Re funded losses consequent upon acts
of terrorism, by the contribution of a total of “£612 million on claims”. This
statistic published by (OECD, 2005) is a clear reason why the Pool Re scheme
was sorely needed in the UK as terrorist activity was quite consistent there and
the losses suffered by it were quelled much more effectively with the
Reinsurance Company Pool acting as a backup.
3.3 UK reaction to September 11th 2001
At the time when 9/11 occurred, the insurance market in the UK was the
largest market in Europe and was the third biggest worldwide and today it also
still holds a high rank in worldwide insurance. Many insurance companies
throughout Britain suffered huge losses financially and during September 11th,
these companies had subsidiaries in the US with its parent companies
originating in Britain. The consequences were principally felt by “members of
the International Underwriting Association and by Lloyd’s” (Liedtke and
Courbage, 2002). In 2001 Lloyd’s was and is still today one of the top ranking
21
insurance and reinsurance companies in the world but it was recorded that they
suffered a loss of almost £2 billion on that day in September which is enough
to cripple any sole company worldwide. According to an article on their
website published in 2011, 9/11 was Lloyd’s largest-ever single loss and it
impacted many different classes of business. Previously before September
11th, there was never any thought that insurance policies such as aviation could
suffer a significant claim while also affecting property, business interruption
and injury in the same incident. They were somewhat unfathomable for
insurers to predict and prepare for. What insurers, like Lloyd’s, clearly learned
from the attacks is that any unthinkable links for insurance claims were now
very much a real possibility. Further realisations from UK insurers were that of
how important an international insurance market was to the world and the role
that reinsurance can play in the midst of catastrophe. The first reaction from
insurers in the UK was how it could control exposures as these events were
clearly going to have a much higher degree of claims than was first realised.
UK insurers firstly verified what exactly was to be covered as part of their
policies. In 1993, at the time Pool Re was established, terrorism was defined as
the means acts of persons acting on behalf of, or in connection with, any
organisation which “carries out activities directed towards the overthrowing or
influencing, by force or violence, of Her Majesty's government in the United
Kingdom or any other government de jure or de facto” (Reinsurance Act,
1993) but the Terrorism Act in 2000 had expanded the definition to an incident
that created a serious risk to the health and safety of a public body. Insurers
were aware that their capacity alone could not withstand the onslaught of
claims that 9/11 brought but with the Pool Reinsurance Company Limited
22
Scheme in place, they had enough financial capital to survive. The Pool Re
was limited in its coverage as back in 2001 it only covered business
interruption losses and also property damage but only when the losses arose
from a fire or explosion. It did not offer protection for any other type of
terrorist attack such as aviation damage etc.
3.4 Expansion of cover
In the immediate aftermath of the attacks, it was clearly realised that the extent
of cover that the Pool Re scheme had would need to be extended. The
immediate modifications would have to include a full range of damage done to
property and also extend the number of consequential losses covered after an
event has occurred. However, the Pool Re was not going to be the only back
up that the UK would need to combat terrorism as there was a much wider
concern for the future, that terrorists would now seek more elaborate ways of
causing harm. Nuclear and biological warfare were two of the obvious risk
types that may be used and this presented the insurance companies with a
worrying view of terrorism risk. After the attacks occurred, terrorism cover
began to be excluded from most all-risks property policies and even specialist
underwriters around the world were struggling to write the risks as their
unpredictability is harrowing. This meant that other changes were going to be
needed to the insurance industry and also the security and protection of the
British public. Again, 9/11 was seen as the beginning of a great evolution in
the insurance industry and since the UK was one of world’s strongest powers,
both in terms of war and financial power, it was time for a great change in
their insurance industry. In order for the Pool Re to become more efficient, the
23
security and safety of the British was paramount in this prolonged fight. For
the insurance industry to feel more at ease as offering terrorism cover, new
levels of security were needed to be put in place. The first real change that
arose in the wake of 9/11 was the Anti-terrorism, Crime and Security Act
2001. It was first signed into the Parliament of the United Kingdom on 19
November 2001, which was just over two months after the terrorist attacks
on the World Trade Centre in the US. The Act took the position that the
Government in the UK should be fully permitted to take whatever measures
necessary when faced with a serious threat, speaking in terms of an incident
like the magnitude of the events that occurred on September 11th. If there was
an immediate and imminent threat evident, then the “measures adopted should
be effective in combatting it and should go no further than the necessity to
meet it”. (Fenwick, 2002). This point made by Fenwick, articulates the
argument that measures must be put in place to stop terrorism by as quick and
reliant means as necessary. The true meaning of this Act can be mirrored onto
the insurance industry as the Pool Re Scheme had its substantial reserves in
place for a greater financial capacity and with the Government acting as a last
resort, the necessity of cover for catastrophe can be met. The Act was much
more focused on securitising Britain than providing provisions for insurance
specifically but the security it provided did help insurers feel more confident in
offering terrorism cover to customers. One such provision was that which
enabled the law in Britain to detain, without a charge or trial, foreign nationals
who may be suspected of terrorism in the UK. This was quite helpful to
insurers as any suspicious acts were quelled before a worrying incident may
have happened. Another provision was that of the enablement of law
24
enforcement agencies to restrict the use of assets of suspected terrorists when
an investigation of them was about to take place. This prevented capital from
being moved around and may have been a key factor in stopping terrorist
movements. These provisions of the Anti-terrorism, Crime and Security Act
helped insurers feel much more protected and open about offering terrorism
cover. Since there was security in place, they felt much less at risk to another
catastrophic loss.
3.5 Expansion of Pool Re in 2002
Towards the end of 2001, there were concerns about the extent of cover that
the Pool Reinsurance Company had. There was a significant difference in what
reinsurers covered compared to what the Pool Re Scheme would cover. The
Pool system had its cover limited to damage by fire and explosion and it also
did not have any cover for war which was generally excluded in most policies
when the Government had declared a state of war. The UK Government
agreed to discuss possible expansive measures of the scheme. An agreed
“terms of reference” was set in place by representatives of British Insurers,
Brokers and also the Pool Reinsurance Company itself. This “Group” of
insurance associates met as frequently as was possible and discussed possible
productive ways that the Pool Re could be enhanced. By July 2002, this group
had come to an agreement on how to tackle the new needs the UK insurance
industry needed since 9/11 changed the industries thought process on terrorism
risk. The first issue that was tackled was the extent of cover the scheme
provided. Since there was only provisions for explosion or fire damage after a
terrorist attack, other consequential damage such as flooding were neglected.
25
Since terrorism was so unpredictable, specialists and insurers could not
determine potential means of attack that terrorists may undertake, therefore the
scope of the Pool Re schemes cover was extended to provide protection for all
risks that arose from an attack or caused interruption to the insured’s business
or damage to their property. The Pool Re scheme was not allowed to be able to
select individual properties for terrorism cover, their choice was to either have
terrorism cover for all properties or else not offer protection to a potential or
existing customer at all. However, the new policyholder did have the right to
exclude certain properties of their choosing upon inception of a new policy.
Some areas of cover that were left untouched by the Group in 2002 was that of
the change to war risks which would still be excluded and also that cyber risk
such as hacking and implementation of viruses would also be excluded as
technology at the time would have found it difficult to prove it was damage
caused from a terrorist attack by using a computer virus. The next change that
was implemented that altered the UK insurance industry was the difference in
premium prices that were going to be in place. Since more cover was
becoming available, there was going to be an obvious price increase as the use
of the Pool Re scheme was never a free system. The manner in which the
scheme charged for its reinsurance was reviewed and with the knowledge of
the new scope of cover it was agreed that insurers may ask their policyholders
for additional premiums and the Pool Re may also require an increase in
payments from insurers for their services depending on the size of the risk
portfolio. Another provision that was highly important in the adaption of the
Pool scheme was that of how much involvement the Treasury had in the
company. Since the company was reinforced by the Treasury in the UK it was
26
fair that they would want to know about the company’s dealings and decision
making. It was agreed by the Group in 2002 that an annual report would be
submitted to the Treasury and any decisions that may need the Treasuries
involvement would also be disclosed immediately. Also the Treasury had a fee
in place which was charged at 10% of Pool Re’s total premium income since it
agreed to act as a reinsurer as a last resort. A key point that was also made in
the discussion of insurers, brokers and reinsurers when speaking about
amendments was how important an open system was between insurers
worldwide. The “London Market and the large international European and
American reinsurers are the main participants in the area of internationally-
traded reinsurance” (Liedtke and Courbage, 2002). Together these two
companies helped unify the world insurance market after 9/11 and kept it well
supported and well capitalised. In the case of 9/11 unification was needed as
the losses were tremendous and one country, even the US, could not withstand
it ferocity alone. Much of the loss suffered in the attacks on September
actually fell back on insurers in areas outside of the USA and therefore
worldwide help was needed. Lloyd’s for example contributed a large amount
of money to the US in the aftermath of the attacks and this proved hugely
beneficial as this extra capital helped the US insurance industry in its time of
great need. This approach was very welcomed by the Group and was
encouraged in times of need. All of these amendments were agreed to be
implemented from the 1st of January 2003. This extension of the Pool Re in
2002, has been the biggest part of the evolution of the UK’s insurance industry
since the 9/11 attacks. The original program was a worthy beginning to the
fight against terrorism risk on an insurance front but through these
27
amendments, the scheme should prove reliant and as of yet has been thankfully
untested by terrorism.
3.6 The Bombing of London 2005
On the 7th July 2005 another terrorist incident occurred in the UK. The London
bombings (which are now referred to as 7/7) were a number of terrorist suicide
bombers who preceded to intentionally injure civilians who were using public
transport in the early hours of the morning. Three of the attacks took place on
the London Underground railway system and the fourth took place on a double
decker bus. This series of attacks was the next substantial terrorist incident that
occurred worldwide after the events of 9/11. Although the consequential
damage was not as devastating as September 11th, it forced insurers and
reinsurers to again rethink and adapt their decision making for the future even
though the losses were covered with ease as a result of the Pool Re scheme
which was in place since 1993. With this program in place, “the insurance
industry as a whole is liable for 75 million pounds per terrorist event” and
losses above this are covered by the mutual reinsurance pool. Should the costs
rise above the funds available through the pool, “then the UK Treasury will
step in to cover the remaining costs” (DigyCat, 2012). During the incidents,
there were fifty-two people killed in the attack and over seven hundred injured
and it was noted that damage costs were estimated to be around £56 million
which ranked well below previous terrorist attacks. An interesting point made
by (Ruquet) in (2005) shows how terrorism has been in some ways nullified
around the world. This proves very helpful to insurance companies as they can
feel more reassured of their terrorism cover knowing that improvements have
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been made. The positive that he believed came out of this was the size of the
attack. It indicates that in places like the UK and the USA, counterterrorism
measures are working. If there is a firm counterterrorism setting in possible
terrorist locations, it does not stop terrorism from taking place, but it does
discourage the size of the attack. 9/11 did help in some ways against the
London Bombings attack as countermeasures were already in place. An article
on (The Economist, 2005) website demonstrates the fact that companies had
emergency plans to cope with disruptions in their businesses which was
implemented after the attacks of September 11th 2001. This attack and also
that of 9/11 will be used to access future terrorism risks for insurers and again
change the industry for the better. As is the case with natural disasters,
recorded data from the incidents can be used by underwriters to price
premiums correctly and make sure they receive enough capital to provide
protection in unfortunate circumstances. Most of the implications that arose
from the London Bombings were again attributed the enhancement of the
securitisation of Britain. These precautions were seen through actions such as
the Terrorist Act 2006 whose amendments helped reinforce the security in the
UK to a greater effect and secondly it helped reassure insurers that terrorism
can be curtailed to a certain degree.
3.7 Terrorism Act 2006
The Terrorism Act 2006 was brought into legislation on the 12th October 2005.
The Act was brought into effect by the UK Parliament in the aftermath of the
London Bombings on 7th July in the same year which made insurers revisit the
devastation of 9/11. The amendments that the Act brought with it involves new
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provisions to combat terrorism and also amends existing ones. This Act can be
seen as very adaptable as it requires that the stipulations introduced from the
Act must be kept under review. This provision would help the insurance
industry in particular because since terrorism is an ever evolving matter, this
Act can put new provisions in place when they are needed to help secure the
UK more profusely. Some of the specific effects that this Act brought with it
eased insurer’s worries about terrorism greatly. One such provision was that of
how the act “extends terrorism stop and search powers to cover bays and
estuaries, and to enable the police to search boats and other vessels” (The
Guardian, 2009). This new provision proved very helpful in the security of
Britain as terrorists try to enter the UK by different means other than air travel.
Airports can be problematic for them due to passport control and extensive
security checkpoints. With law enforcers now able to search incoming boats,
terrorists arriving to the UK, with intention to do harm, can be stopped before
they commit any possible damage. In a review by (Anderson, 2013), he sums
up just how effective this provision was in a worthy statement explaining that
“19 persons were charged with 19 offences under TA 2006 during the same
year, 15 of them under section 5 of preparation of terrorist acts”. This statistic
shows the effectiveness of the Act as a whole since Britain is becoming more
secure, the insurance industry can become more reliable in the availability of
cover for terrorism risk. Another amendment that can be seen as having a
positive effect for insurers was that of the establishment of new offences
relating to the possession or the making of nuclear material and also making it
a criminal offence to be illegally on a site of nuclear activity. This is a
particularly important amendment because terrorists are adapting their
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strategies and attacks by nuclear means is an unfamiliar one for Governments
but this provision is a step against suppressing nuclear terrorism. With this
provision in place, increased security at nuclear stations and sites of nuclear
activity and also imprisonment for possession of nuclear material can be
hugely beneficial and with it this risk is suppressed at the source.
3.8 Resiliency of the UK
What 9/11 taught the world was that a terrorist attack can occur at any time, in
any place and can target anything. The role of insurance in protection against
these risks and the availability of cover is imperative worldwide. Since 1993
the UK has had a system in place as back up for a future terrorist attack and as
time has moved on since then it has further increased its securitisation for the
better. Through different Acts and the Pool Re scheme, the UK has shown
great resilience in the face of hostility. During 9/11 it provided much needed
back up to the US and proved that international unity is a much needed entity
for insurance industries. The aftermath of 9/11 presented many different
problems for countries worldwide and they needed to have protection against
these problems before they began a chain of an unprecedented amount of
claims. The 2005 London Bombings showed just how much the UK had
adapted its systems from 1993 and then again after 9/11. The Pool Re was not
called upon as insurers had enough capacity to deal with the claim through
their own received premiums. Without the specific terrorism cover they had
offered at that time the incident could have proved crippling to insurers. The
UK learned a valuable lesson from the bombings. They did not alter much of
the insurance coverage offered as was seen in the US, but they did put a great
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deal of work into improving the security around the UK through different acts
of legislation. With increased security, insurers may not be called into action
as terrorists may be unable to bypass the first line of the UK defences which is
implemented by the law enforcement.
32
Chapter 4 Possibilities in the Future
4.1 Time of Great Change
The years from 1993 to 2014 have shown the world the ferocity of what
terrorism can do. It has the ability to shatter companies financially and it can
also reduce what was once a proud international landmark to rubble. In both of
these cases the insurance industry is sorely needed for protection resulting
from property damage, business interruption, loss of life and liability claims.
Scenarios of catastrophe changed that day in September 2001, as the
magnitude of possible loss was not immeasurable. The evolution of insurance,
particularly in the US and the UK, has been outstanding over the past number
of years. Terrorism is the toughest risk for insurers to deal with due to its
unpredictability. Companies can in many ways insure against the possible risk
of terrorism and its consequences with more ease because they have learned
and adapted from previous attacks. It is extremely challenging for insurers and
reinsurers to predict and quantify the risks of terrorism and their underwriters
find it difficult to preciously measure even with their sophisticated modelling
procedures. Insurers and reinsurers must learn from the past and be prepared
with large reserve pools in place and trust in the security of their nations. What
9/11 has done for the world is imprinted the word “insurance” on the mind of
public bodies internationally. In its aftermath, some people of the general
public realised that insurance wasn’t just a simple use of their money but it
was now a necessity in their lives.
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4.2 Advancements in Future Terrorism Threats
Terrorism around the world has survived and also evolved in this modern age
and it is still continuing to adapt to meet the challenges of increased barriers
and security that is put in place for them by the law. Just as the insurance
sector has shown momentous progress in its amendments and legislation
against terrorism risk, terrorist groups have also shown significant progress in
escaping from a subordinate role in nation-state conflicts, and becoming
prominent as international influences in their own right. They are using their
initiative to form alliances with other troubling entities, such as organisations
of criminals and are steadily gathering a worrying identity with governments
worldwide. One way in which terrorists have evolved to make it difficult for
governments and the insurance industry to prepare for a possible onslaught is
how they operate through a network of command and there is no single entity
in control. With this method, it is almost for impossible for military units to
discover a leader and stop an attack at its source. Through multiple chains of
command, terrorists operations are quite unpredictable. The intimidating use of
current technologies by terrorists for communication means and also the rise in
intelligence has increased their effectiveness. New weapons technology has
also become more available and with the financial capacity of terrorists
growing their capabilities may be boundless. These funded terrorist operations
are easily proficient in surpassing the complexity of counter-measures that are
in place against them. In modern times, terrorists require a large audience in
order to carry out their intended messages and therefore the size of their
attacks in the future must increase. New areas such as cyber terrorism are areas
in which they may try to exploit. In an article by (Rothman, 2012) he explains
34
how cyber terrorism can attack the banking sector when “criminal hackers use
their multitude of computers and malware to flood the targeted site with
massive amounts of traffic until it is overwhelmed and thus shut down. The
resulting downtime is damaging in countless ways”. This is an example of the
evolution of terrorism attacks as Governments and banks are faced with new
risks as they try to protect the livelihoods of people worldwide. The attack of
governmental computer systems has the ability to put nations worldwide at
risk, as launch codes and weaponry may be hacked and this is the reason why
cyber-attacks may need to be more focused on. Other attacks by nuclear,
radioactive and advanced weaponry are also areas that the Government and
insurers alike must prepare for in the future.
4.3 Preparing for the Future
As we progress further in the 21st century, terrorism risk and its insurance
cover must be constantly reviewed and adapted in the same manner that has
been done over the last twenty years. There are a number of small but
necessary measures that have been brought in around the world such as the
removal of bins in London. In the London Underground, there are no bins
available because of previous terrorist attacks and also on streets near major
attractions bins have also been excluded. The use of bombs by terrorists has
forced the UK into this decision and it is a step in avoiding another
catastrophic event. The future of terrorism risk is unclear as they seek new
ways of carrying out an attack on an unsuspecting population. The insurance
industry must adapt in kind to combat terrorism. A quote from (Dooley, 2015)
35
in a recent article on the Lloyd’s websites shows how the companies linked to
the Pool Re Scheme look for more adaption consistently. “As the threat
evolves, Pool Re will keep the coverage that it provides under constant
review”. Recently the Treasury in London have reviewed changes into the way
that the Pool Re Scheme is to be funded. The reason behind the changes are
seen to be that since terrorists attacks may become more elaborate and
damaging, a bigger reserve pool must be available and the HM Treasury who
has made a charge of 10% of Pool Re’s total premium income for agreeing to
act as reinsurer of last resort but this has “increased the charge from 10% to
50%” (Willis, 2014). If recent trends continue, cyber terrorism may be the next
area that terrorists try to exploit for their own means. In a recent article by”
(Sturdevant, 2015) he voices his opinion of how insurers have kept pace with
the rapid changes in technological risks since cyber insurance established
critical mass but “they’ve proceeded cautiously”. This is a matter that needs to
be addressed in the near future before it is too late, as there is not near enough
market saturation in the cyber terrorism insurance market as there needs to be.
Lloyds of London, for example, has no cover for cyber insurance in place as
they believe that the underwriting it involves is quite perplexing even though it
is a huge opportunity for the company to sell more cover and increase profit
margins. There are companies in the UK that do offer protection but there is
excessive restrictions on what can be covered and the premiums are charged at
very high prices. This is an area for the UK that needs to be reviewed and
adapted for the future. The US, in turns of cyber insurance has taken a
difference approach, through its implementation of the National Cybersecurity
and Critical Infrastructure Protection Act of 2013 it has placed sufficient cover
36
in place for cyber terrorism and this would help ease the losses arising from
areas such as business interruption. Other areas that the US have amended in
their evolution against terrorism is the amendments made to Terrorism Risk
Insurance Program Reauthorization Act (TRIEA) and this has been passed into
US legislation again with advanced areas of cover and more provisions for
insurers to feel more confident in providing extended terrorism cover. There
are slight differences in how the USA and the UK insurance industries markets
prepare against terrorism risk. The Pool Re can be viewed as a permanent
body which is willing to act as the insurer of last resort in a catastrophic
occurrence whereas the stipulations under the TRIEA are more of an interim
measure which is used to enhance the insurance market activity through
consistent amendments. Both measures have proved able bodied in the fight
against terrorism risk but 9/11 has been the only true test of their capabilities.
4.4 Unique Terrorism Insurance
Certain companies worldwide such as AIG and XL Group PLC have begun a
new and innovative way of combatting terrorism which may possibly be the
future of how the insurance industry deals with terrorism risks. It is the idea of
the inception of a new separate insurance market that would be capable of
standing up against terrorism, it can also be known as a standalone terrorism
market. While the September 11th attacks installed the idea of a constant and
considerable threat in the minds of the insurance industry through a possible
large scale event, it should not be forgotten that a single large scale attack is
not the only threat: the possible “accumulation of medium size terrorist attacks
37
in a limited time period creates a growing danger” (OECD, 2005) and these
attacks may gather together in ferocity and become as catastrophic as one large
single attack. For this reason this new possible area that may be enhanced for
the future would be for a standalone terrorism insurance market where perhaps
subsidiaries of a parent company may focus on providing cover for small and
medium sized terrorist attacks and have their parent company in reserve if they
are needed. This would focus the large reserve pools of the parent company on
a large attack but the capital obtained through premiums in the subsidiaries can
quell attacks on a smaller scale. The possible other benefits it could include
would be the introduction of coverage for acts of terrorism whether the act is
committed nationally or abroad in a different country. As well as that all types
of terrorism cover could be available such as nuclear and biological and that
business interruption and property damage would still be included even if war
has been declared. These benefits of the standalone market are the current gaps
seen in today’s markets in the UK and the US. The adaptation of the US and
the UK since 9/11 has been staggering but just as terrorists will continue to
adjust their means, the insurance industry must gain the advantage and have
necessary steps taken before another event may occur.
38
Conclusion
In conclusion, if 9/11 taught the insurance markets in the US and the UK
anything, it is that terrorist attacks are an unfathomable occurrence and
preparation is our only guaranteed defence against them. As a result of 9/11
both sectors have seen drastic improvements in the markets but amendments
and the very possible notion of a valiant stand-alone market may just be the
key to providing protection against terrorism and its consequences. Insurers
rely on the reinsurance industry for financial security in the case of a large
claim or large accumulated claims occurring. September 11th made both
insurers and reinsurers agree that they alone did not have the financial capacity
to deal with terrorism risks using their standard methods. It became obvious
that the combined input of the insurance industry and the Government would
be the right turn for the industry to take. The UK followed this method but the
US took a different direction in the evolution of their market. The US market
have continued to enhance scopes of cover and security and recently they have
signed the Terrorism Risk Insurance Program Reauthorization Act for 2015
into law until the year ending 2020 with new provisions for the definition of
terrorism included. However, in terms of the future of this act, it seems that a
new extension in 2020 is becoming more unlikely. There seems to be a lot of
opposition to the Act as it is based upon too much Government involvement. It
is believed that through the enlarged capacity of reinsurance and the new
possible use of stand-alone terrorism insurance availability with its enhanced
modelling capabilities that the need for the backing of Parliament might be
fully mitigated. In the UK a recent update was brought in with huge support by
both sides of Parliament. The Counter-Terrorism and Security Act was
39
established on the 12th February 2015 following agreement and huge support
by both Houses of Parliament. The Act contains new laws with provisions to
toughen counter-terrorism proficiencies in Britain which include
enhancements in the monitoring and exposure of terrorist’s activities. Another
interesting provision the Act also introduced is that of the capability of
governmental agencies to track devices that may be responsible for sending
communication using the Internet if there is suspected terrorist activity. This
can be done from mobile phones, social network and instant messaging
services. These recent changes show just how much 9/11 has changed the
thinking process of nations worldwide as they strive to prevent terrorist
attacks. This in turn has a huge effect also on insurers as they become more
willing to provide protection if security measures fail and a terrorists attack
does occur. The importance of insurance is incomprehensible to people,
businesses and their ways of life. Its evolution is a never ending course and
although terrorism risks did not stem from 9/11, it took this devastating event
to begin an extensive change to the worldwide insurance industry. “The
certainty and confidence that insurance provision brings to all our daily lives,
whether business or personal, enables us to breathe more easily, to find the
confidence to let innovation flourish and to engage with the present and the
future, chastened by the past but not allowing the fear of the possible to
paralyse us in the present” (Mary McAleese, 2010).
40
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Erwann O. Michel Kerjan, 2012, TRIA at 10 years, The Future Of Terrorism
Risk Program, September 11th,
http://opim.wharton.upenn.edu/risk/library/2012-09-11_TRIA-
testimony_MichelKerjan.pdf (assessed on 04/01/2015)
Patrick M. Liedtke and Christophe Courbage (2002), Insurance and September
11 One Year After, Geneva, August 1st, The Geneva Association
Hale, David. (2002). “America Uncovered.” Financial Times. September 12
John Cogliano, 2011, Why 9/11 Changed Everything, The Insurance Journal,
September 12th,
http://www.insurancejournal.com/news/national/2011/09/09/214101.htm
(assessed 17/01/2015)
41
Beth Rowan, 2007, Post 9/11 Changes By The US Government, October 25th,
http://www.infoplease.com/us/history/911-anniversary-government-
changes.html (assessed on 17/01/2015)
Brill, Steven, 2003, After: Rebuilding and defending America in the
September 12 era, New York, September 2nd, Simon & Schuster.
Congressional Record, July 22, 2003, Assessed on (19/01/2015)
http://www.fas.org/irp/congress/2003_cr/h072203.html
Shawn Reese, 2013, Defining Homeland Security: Analysis and Congressional
Considerations, Congressional Report Service, January 8th,
http://fas.org/sgp/crs/homesec/R42462.pdf (Assessed on 19/01/2015)
Rick Ham, 2013, The Benefits and Limitations of Cyber Insurance, Risk
Management Monitor, March 6th,
http://www.riskmanagementmonitor.com/the-benefits-and-limitations-of-
cyberinsurance/ (assessed on 19/01/2015)
Terrorism Risk Insurance Program, 2015, US Department of Treasury,
February 2nd, http://www.treasury.gov/resource-center/fin-
mkts/Pages/program.aspx (assessed on 05/02/2015)
OECD, 2005, Terrorism Risk Insurance in OECD Countries, 9th edition, Paris
France, OECD Publishing
Howard Kunreuther, The Role of Insurance in Managing Extreme Events:
Implications for Terrorism Coverage, Business Economics Vol. 37, No. 2
(April 2002), pp. 6-16 http://www.jstor.org/stable/23490108 (Assessed on
06/02/2015)
42
Robert Ball, 2006, Terrorism Risk Extension Insurance Act (TREIA): Revised
Federal Participation In Catastrophic Risk, Integro Insurance Brokers, August
1st, http://www.integrogroup.com/data/File/white-papers/triea_white_paper.pdf
(assessed on 06/02/2015)
Martin Dillon, 1996, 25 Years of Terror: The IRA's war against the British,
2nd edition, New York City, September 26th, Bantam Books
Christian Thomann, 2004, War, Terrorism and Insurance in Europe After
September 11th 2001, Karlsruhe, October 21st, Verlag
Versicherungswirtschaft
Reinsurance (Acts of Terrorism) Act, 1993, chapter 18
Lloyds (2001), Remembering 9/11, Lloyds Market, September 9th,
http://www.lloyds.com/News-and-Insight/News-and-Features/Market-
news/Industry-News-2011/Remembering-September-11th (assessed on
06/02/2015)
Richard B. Allyn (2003), The Fall And Rise of Terrorism Insurance Coverage
Since September 11th 2001, Robins, Kaplan, Miller & Ciresi,
William B. Brice, 1994, British Government Reinsurance and Acts of
Terrorism: Problems of Pool Re, May 31st,
http://heinonline.org/HOL/LandingPage?handle=hein.journals/upjiel15&div=2
1&id=&page (Assessed on 06/02/2015)
Helen Fenwick, 2002, The Anti- Terrorism, Crime and Security Act 2001: A
Proportionate Response to September 11th, The Modern Law Review, Vol. 65
No.5, P. 724-725 http://www.jstor.org/stable/1097614 (Assessed on
06/02/2015)
43
Greg Dooley, 2005, FT: Pool Re To Review Terrorism Cover For Business,
Pool Re: Reinsuring Terrorism Risk, January 20th,
https://www.poolre.co.uk/ft-pool-re-review-terrorism-cover-business/
(Assessed on 08/02/2015)
Mark E. Ruquet, 2005, Damage From London Terror Bombings Could
Reach $100 Million, Property Casualty 360, July 18th,
http://www.propertycasualty360.com/2005/07/18/damage-from-st1place-
xmlnsst1urnschemasmicrosoftco (Assessed on 08/02/2015)
The Economist, 2005, London After The Bombs, The Economist, July 14th,
http://www.economist.com/node/4174726 (Assessed 09/02/2015)
DigyCat, 2012, Life Insurance Fears Post London Bombings,
http://insurance.digycat.com/52249.php (Assessed 09/02/2015)
David Anderson, 2014, Report Of The Independent Reviewer On The
Operation Of The Terrorism Act 2000 And Part 1 Of The Terrorism Act
2006, The Terrorist Acts in 2013, July 31st,
https://terrorismlegislationreviewer.independent.gov.uk/wp-
content/uploads/2014/07/Independent-Review-of-Terrorism-Report-2014-
print2.pdf (Assessed on 10/02/2015)
The Guardian, 2009, Terrorism Act 2006, January 19th,
http://www.theguardian.com/commentisfree/libertycentral/2009/jan/19/terror
ism-act-2006 (Assessed on 10/02/2015)
Terrorism Research, 2015, Future Trends in Terrorism,
http://www.terrorism-research.com/future/ (Assessed on 20/02/2015)
44
Willis, 2014, Changes to the Way Pool Re is Funded,
http://www.willis.com/documents/publications/industries/Property_Investors
/Changes_to_Pool_Re_funding_REP_-_Dec_14.pdf (assessed on
20/02/2015)
Matthew Sturdevant, 2015, When Terrorists Attack Online, is Cyber
Insurance Enough, Hartford Courant, January 26th,
http://www.courant.com/business/hc-cyber-terrorism-insurance-20150126-
story.html#page=1 (assessed on 21/02/2015)
Alison Knight, 2015, Counter Terrorism and Security Act 2015 Receives UK
Royal Assent, February 19th,
https://peepbeep.wordpress.com/2015/02/19/counter-terrorism-and-security-
act-2015-receives-uk-royal-assent/ (Assessed on 02/03/2015)
Mary McAleese, President of Ireland, remarks to the European Insurance
Forum, RDS Concert Hall, Dublin, 30 March 2010]
http://thefinanser.co.uk/files/fs-club---the-price-of-fish---04-07-12-v1-1.pdf
(Assessed on 02/03/2015)