Terrorism cover was originally designed to respond to property losses from terrorism caused by large explosive devices. However, attack methodologies have shifted in recent years.
Today, the predominant threat globally is from Islamist extremists focused on inflicting mass casualties in low-capability attacks on crowded public spaces. Modern attacks are often less sophisticated, with assailants deploying bladed weapons, firearms, and/or vehicles.
This new attack methodology generally generates relatively little property damage. In fact, two-thirds of terrorist attacks in Western Europe between 2014 and 2018 did not generate any property damage, according to Pool Re. Still, multiple businesses suffered significant revenue losses as a result of various attacks.
For example, in the wake of the 2017 London Bridge attack, extensive police cordons remained for 10 days, generating widespread business interruption losses.
Since there was limited physical damage, many insureds were left without cover. Businesses lost an estimated £1.4 million from the London Bridge attack, according to Pool Re.
Beyond direct business interruption losses, many businesses in or near areas struck by terrorism often see a decline in foot traffic well after cordons are cleared. The tourism and retail sectors are particularly at risk for losses following terrorist attacks.
These trends, coupled with the proliferation of incidents that are not clearly described as acts of terrorism, such as mass shootings in schools, churches, private businesses, and public settings, have prompted insurers to innovate amid demand from buyers. Specifically, insurers have focused on developing:
- Active assailant coverage, also known as active shooter, malicious attack, or deadly weapons coverage — which typically offers affirmative coverage that is triggered by premediated malicious physical attacks by active assailants who are physically present and armed.
Such policies can offer coverage for property damage, business interruption, and extra expenses; legal liability; loss of business and denial of access; and the costs of public relations consulting, crisis management, medical services, counseling and/or psychiatric care, the hiring of additional staff, and added security.
- Non-damage business interruption (NDBI) coverage, which can respond to the loss of revenue even without a physical damage coverage trigger. NDBI policies are evolving to respond regardless of whether an event is officially classified as a terrorist attack. This coverage is tied to a predetermined vicinity of an insured location, which can vary from policy to policy.
Standalone market offers flexible and dependable coverage
Standalone property terrorism insurance is available as an alternative or complement to TRIPRA coverage. Pricing for the standalone market is typically not affected by natural catastrophe events and is expected to remain competitive in 2019, barring a material change in market conditions.
Unlike TRIPRA coverage, which is available within annual “all-risk” property policies for US locations, a standalone property terrorism insurance policy does not require the government to certify an act of terrorism in order for a claim to be paid.
Standalone policies offer broad terms and conditions that can include:
- A definition of “act of terrorism” as the use of force or violence — of any person or group, whether acting alone or on behalf of or in connection with any organization — for political, religious, or ideological purposes, including the intention to influence any government and/or to put the public in fear for such purposes.
- Consistent wording globally.
- Tailored coverage for selected locations, coverage outside of the US, and political violence coverage.
- Multiyear policy terms.
- Nuclear, biological, chemical, and radioactive (NBCR) coverage, although this may be limited in scope and costly.
- Non-damage business interruption coverage.
- Property damage as a result of a cyber-attack.
Although available standalone capacity currently has a theoretical maximum of approximately $4.3 billion, locations in the central business districts of Tier 1 cities, which are perceived as at higher risk for terrorism, can present accumulation concerns for insurers.
Any uncertainty about the future of TRIPRA could depress capacity in Tier 1 cities as companies lock in the coverage certainty on a first-come, first-served basis.
Political violence coverage can supplement terrorism insurance
While terrorism insurance can cover physical damage and business interruption resulting from acts that are motivated by politics, religion, or ideology, multinational businesses may also wish to consider purchasing political violence (PV) coverage. In addition to terrorism, PV policies can provide coverage related to war, civil war, rebellion, insurrection, coup d’état, and other civil disturbances.
Because PV policies are designed to respond to the perceived risk within the territories in which a business operates, purchasing such coverage can help avoid disputes about whether an event was an act of terrorism or political violence.
Purchasing terrorism and/or PV coverage alone, however, can leave some buyers with gaps in coverage, as potential risks can extend beyond the threat of violence.
Broader political risk insurance policies can include PV coverage while also responding to a range of other perils related to government actions and instability, including expropriation of assets, forced abandonment, currency inconvertibility, and non-payment and contract frustration.
US organizations continue to purchase terrorism insurance at high levels
Overall purchasing rates steady
The US is the world’s largest buyer of terrorism insurance, and US-based organizations continue to purchase coverage at a high rate. In 2018, the take-up rate for TRIPRA coverage embedded in US property policies was 62% (see Figure 4). Take-up rates have remained close to 60% over the last several years.
Industry approaches vary
The percentage of companies that purchased terrorism insurance — and the amount they spent on terrorism insurance as a portion of their overall premiums — varied significantly by industry in 2018.
Education institutions, media organizations, financial institutions, and real estate companies were the most frequent buyers while transportation and hospitality and gaming companies spent the most on terrorism as a percentage of their total premium spend due to their perceived vulnerability (see chart below).
Lower costs for larger companies
With insurers suffering few significant losses in recent years — most of which occurred outside of the US — and both new entrants and incumbents committing to underwriting terrorism risk, overall property terrorism insurance capacity remains abundant. Consistent with previous years, property terrorism insurance rates in 2018 were typically lower for larger companies (see chart below).
In 2018, the cost of terrorism insurance as a percentage of overall property premiums was highest for companies with total insured values (TIV) of $1 billion or more (see chart below).
Take-up rates highest in major metropolitan areas
Companies based in the Northeast United States have traditionally purchased property terrorism insurance at a higher rate than companies based in other regions. Unsurprisingly, 80% of companies based in New York purchased terrorism insurance in 2018, tying it with Chicago for the lead among major US cities that are perceived as higher-value targets for terrorist acts (see below).
New York-based companies also spent the most on terrorism insurance as a percentage of total premiums. Companies based in Los Angeles and Houston purchased terrorism insurance at the lowest rate within this group, but the price per million for terrorism insurance was highest for Houston-based companies — exceeding even New York-based companies — in part because of high overall property insurance premiums paid by energy companies, many of which are headquartered in Houston.
PLANNING EXERCISES REMAIN CRUCIAL
Although insurance can provide essential protection in the event of a terrorist attack, it’s vital that businesses also develop, maintain, and exercise corporate and site-level crisis management plans.
Organizations should develop and test an overall framework and crisis management team structure for management, response, and recovery at the senior executive level. Following a terrorism incident, organizations should be prepared to ensure the safety of employees and provide them with support as needed, protect physical assets, and stay in contact with employees and their families, customers, investors, and other stakeholders.
Once life safety issues have been addressed, organizations should look to keep operations — including critical technologies — running smoothly. Among other actions, businesses should develop and test business continuity plans, coordinate insurance coverage, and prepare to gather appropriate information to support a claim. Risk models and other analytic tools can help organizations assess the potential magnitude of terrorism events and optimize insurance programs and other risk financing strategies.
Captives continue to write terrorism risk
In 2018, 182 Marsh-managed captives accessed TRIPRA to write property, workers’ compensation, general liability, and cyber risk for their parent companies. Captive owners have often found that the total cost of implementing terrorism insurance programs compares favourably to the cost of buying from commercial insurers. Captive insurers can generally offer broader coverage than commercial insurance policies, which often restrict coverage for:
- NBCR events.
- Contingent time-element losses.
- Cyber terrorism.
Managing risks to workers
As attacks by lone wolves and small groups remain a significant threat, employers are increasingly concerned about terrorist incidents occurring in or near their workplaces.
Work-related injuries and deaths are covered under workers’ compensation systems in US states. Workers’ compensation insurance policies cannot exclude terrorism-related losses and are a compulsory purchase for employers in nearly all states. Still, insurers carefully manage their overall portfolios and consider large employee concentration exposures and the associated loss potential, which means that data quality in underwriting submissions can significantly affect how insurers evaluate and price an organization’s workers’ compensation terrorism risk.
Robust and complete data can also enable insurers to understand employers’ risk profiles in the context of their overall workers’ compensation book and correlating risks, including property, personal lines, and life insurance.
Simple payroll data by location, however, is unlikely to suffice; instead, employers should be prepared to share with underwriters:
- Detailed address information, including ZIP codes.
- Employee locations on campuses.
- The number of shifts per location and employees assigned to each.
- The number of telecommuters that an organization employs.
- Details from swipe cards showing the actual or maximum number of employees present at each location or building on a given day.
OUTSIDE OF THE US
Globally, employers are often legally required to secure workers’ compensation for some or all employees. In many countries, it is provided through government programs; in others, employers must secure it.
Workers’ compensation policies issued to the parent company or “local” operations in other countries alone, however, may not address exposures associated with multinational enterprises and a transient workforce. To expedite workers’ recovery and to protect companies from lawsuits, employers may also purchase discretionary coverages. These include:
- Employers liability coverage, which defends and indemnifies employers from lawsuits brought by workers for injuries arising out of the course of their employment within the policy territory. Similar to foreign voluntary workers’ compensation (FVWC), it is provided in the US as part of workers’ compensation insurance. Outside of the US, the coverage may be found as an endorsement on local workers’ compensation or general liability policies or purchased on a standalone basis.
Coverage under employers liability is customarily included in umbrella or excess liability policies.
- Personal accident insurance coverage, which can supplement local workers’ compensation benefits or act as an employee benefit program.
The provision of compensation for medical care and lost wages for terrorism-related injuries will depend on the system in place in the worker’s country of hire and/or work. Expatriate workers present a unique situation; when and where specific programs will apply to an expat will depend on:
- The employee’s nationality (country of origin).
- Where payroll is reported (country of hire).
- The length of the employee’s work assignment.
Coverage for injuries and illnesses due to acts of war or terrorism may differ depending on which insurance policies are in place, which are triggered and, for workers’ compensation, whether the law extends coverage to such events. For compulsory workers’ compensation coverage, terrorism is typically provided due to the broad extent of coverage under the law or by specific laws.
In some countries, however, government-provided benefits are broad and may not distinguish the cause of injury or illness in determining eligibility.
For discretionary insurance, such as FVWC, employers liability, and personal accident policies, terrorism coverage is typically not required and may be excluded by default. Coverage for terrorism can typically be added by endorsement, usually for an additional premium. However, terrorism is generally not excluded for FVWC policies placed in the US.
Multinationals based in the US should review their general liability controlled master programs and other umbrella or excess liability policies for coverage.
As part of an effective terrorism risk management program, employers should consider local insurance regulations along with the size, concentration, and significance of their workplace injury exposure in the countries in which they operate.