Nearly two decades on from the devastating 9/11 attacks, the threat of terrorism is not only still with us – its form has shifted over the years.
Instead of mass orchestrated attacks, cities across the globe have seen the emergence of attacks by “lone wolf,” individuals with extreme views. In the U.S., recent incidents have included the 2013 Boston Marathon bombings, the 2016 Orlando nightclub shooting and the 2019 El Paso shooting, which have been considered “domestic terrorism.” For some large multinationals, an “active shooter” on the premises is even disclosed in financial filings now, warning investors of such a risk to the business.
Acts of terrorism can tragically result in injuries and loss of life. Additional damages caused by these events can be felt from trade to infrastructure, which can handicap businesses and even economies.
In the U.S., the response to 9/11 included the Terrorism Risk Insurance Act (TRIA) in 2002 as a financial backstop to protect private markets against losses incurred from terror incidents. In the years since, that insurance has allowed businesses in areas that might be exposed to terrorism threats, such as major cities, to grow and prosper.
“As terrorism continues to rise, TRIA is a critical mechanism for transferring the risk, and the vast majority of that risk resides within the private marketplace,” says Aaron Davis, managing director, Property Broking at Aon. Unless it’s renewed, however, TRIA’s current iteration – and the subsequent Terrorism Risk Insurance Program Reauthorization Act (TRIP) – will expire December 31, 2020.
Aon’s 2019 Risk Maps found a recent shift in Europe and North America from attacks motivated by religious extremism to terrorist acts motivated by national extremist beliefs. In western countries, far-right attacks are on the rise, revealed by the 2019 attacks on two mosques in New Zealand that killed 50. The Sri Lanka bombings soon after further demonstrate that the overall terrorist threat – influenced by either form of extremism – aims to inflict casualties and exacerbate divisiveness within communities.
In addition to physical and bodily harm, an increasingly connected world has also raised concerns over acts of cyber terrorism aimed at health-care providers, government services, entertainment companies, financial institutions or energy providers. Attacks on these potential targets could lead to massive financial losses.
Terrorism Risk Insurance Act – A Financial Backstop
The Terrorism Risk Insurance Act (TRIA) was originally created as a temporary program, but it was extended in 2005, 2007 and 2015 as the Terrorism Risk Insurance Program Reauthorization Act (TRIP). Throughout its iterations, TRIA has acted as a reinsurance backstop for commercial property and casualty insurance policies when triggered by certified acts of terrorism at designated loss levels.
“TRIP is a reinsurance mechanism providing $100 billion of reinsurance liquidity following a catastrophic terrorism event,” says Davis. “And it’s structured in such a way that the industry retains a majority of low-level loss.”
The concept of such a terrorism insurance backstop isn’t unique. For example, the U.K. insurance industry and government created Pool Reinsurance Company Limited in 1993 to ensure that member insurers can cover losses resulting from acts of terrorism.
Since TRIP’s creation, a significant proportion of commercial insurance policyholders have elected to purchase terrorism coverage. The take-up rate for terrorism coverage in industry subsectors – such as real estate, health care and entertainment – is more than 90 percent, demonstrating the increasing concern of the threat.
TRIA’s economic effect is visible in the short gap between the attacks and its first authorization in 2002. In just over a year, the lack of appropriate coverage was tied to $15 billion in hindered or lost real-estate transactions and approximately 300,000 jobs lost, according to the White House Council of Economic Advisers.
Beyond businesses purchasing terrorism insurance for property risks, issues regarding the casualties of attacks might be even more significant. As workers’ compensation mandates coverage for nuclear, biological, chemical and radiological risks, the absence of TRIP could mean insurers’ withdrawal from markets with high exposure to workers’ compensation.
Amid The Threat, The Terrorism Risk Insurance Act Provides Stability
While TRIA and TRIP have never been tested, the U.S. Department of Treasury has found that TRIP has succeeded in making affordable terrorism insurance available in the U.S.
Davis states that “failure to reauthorize TRIP could eliminate the private market for U.S. terrorism risk coverage, which could devastate the market.” But an early and extended restoration of TRIP – perhaps for 10 years with its current provisions intact – would maintain a stable market, he explains.
The threat of terrorism might have changed since 2001, but it certainly hasn’t diminished. As terrorism risks grow more numerous and more complex, businesses must do all they can to protect themselves from exposure.
“The rise of national extremist acts of violence and other terrorism exposures are making U.S. terrorism risks more complex,” says Scott Bolton, director of Crisis Management at Aon. “That changing terrorism landscape is leaving certain types of businesses – such as retail, sports and entertainment, transport and religious sites – particularly vulnerable. When we add additional motives and means, such as cyber terrorism and nuclear threats, there’s possibility for a much broader consequence that we need to protect.”
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