Insuring against Terrorism – This Underwriter’s Historical Perspective
We are marking the 20th anniversary of the 9/11 attacks on New York City and Washington DC. Perhaps there is no better time to look back and see what it has meant to those of us in the insurance industry.
While explaining his decision to bring an end to the war in Afghanistan, President Biden spoke about how many of those serving in uniform were not even alive when we were attacked. If you look at the ages of those recently killed in the attack in Kabul, that is in fact true. In a similar vein, many of my insurance brethren, underwriters, agents, and brokers, were not working in the industry.
On 9/11, I was working for an MGA in Indiana that specialized in insuring risks within the sports and entertainment industry. Our clientele included professional sports teams, venues, amateur sports organizations, and amusement parks. They were risks which were perhaps considered prime targets for follow on attacks.
From a coverage perspective, the insurance industry was caught flat footed on of how large of a problem terrorism had grown and the potential impact it had on insurance products. Our industry has historically not covered events which were deemed too large for private insurance companies to effectively handle. One of the events was war since the size of loss was so cataclysmic. However, the prevailing definition of war in the “war” exclusion failed to recognize terrorist or terrorism and was not part of the exclusion, probably because until then nobody had thought terrorist attacks could wreak such havoc.
The attacks on September 11th proved terrorism had evolved into a more warlike action. Reinsurers took the brunt of the insurance losses from the 9/11 attacks. Without an accurate method to model terrorism exposures, reinsurers excluded terrorism from treaties leaving primary insurers bare. Without reinsurance, ISO and individual carriers were recrafting the war exclusion to exclude another terrorism event from property, general liability, auto, and inland marine policies. In addition, they were also crafting limited coverage for terrorism events through using sub-limits to prevent an overaccumulation of values exposed to another event like the September 11th attacks.
But there was one coverage which could not be excluded or modified to prevent over aggregation of exposure to a single event. That was workers’ compensation. On September 11th, almost 3,000 people died while at work in the World Trade Center. The only good news from an workers’ compensation perspective was carriers were limited to the death benefit designated by New York State workers’ compensation of $50,000 per person. It could have been a much larger loss for the insurance industry. Up till now, accumulation or aggregation of employees for multiple employers did not rank very high as an underwriting consideration for worker’s compensation. But the attacks of September 11th change all that.
As I was underwriting in the sports and entertainment segment, most of the risks I was managing were considered prime targets for future terrorist attacks. Our initial approach was to try to underwrite the exposure. We developed a series of underwriting protocols to determine how risks could prevent attacks to their businesses. There is little one can do to prevent a determined suicide attacker. We adapted an approach to assist our clients to become harder targets with the idea that even a suicide bomber would seek to attack a softer target over a target that at least made it a bit more difficult to succeed which would make it more difficult for visitors to successfully sue under liability coverage.
In many ways the underwriting tools we pressed into service to evaluate exposure to another terrorist event were existing controls but with an enhanced importance toward security. For example, physical barriers have always been an important underwriting consideration to restricting unwanted foot traffic. However, with terrorism the robustness of the barriers took on greater emphasis. Being aware of who was entering your premises was always important, but screening took on greater emphasis. While housekeeping has always important, but trash receptacles became a tool to increase the fragmentation for bombs and facilities needed to figure out a way to minimize their use.
Those were just a few examples. Perhaps it was our underwriting, but none of our clients suffered from another attack.
However, many of our clients could do nothing about the aggregation of employees. When you think about it there’s no practical way an NFL team to reduce the number of players gathered in one location exposed to the same event. To make matters worse, it was entirely possible we could have 2 or 3 clients together in the same place at one time. Therefore, we decided to withdraw from the line of coverage we offered clients.
Most businesses found it impossible to buy coverage for terrorism and if available the cost was prohibitive. This posed a significant risk to lenders and investors, since a major exposure to risk was left unprotected. Like us in the sports and entertainment field, the real estate, transportation, construction, energy, and utility sectors of the economy were vulnerable, threatening the economy.
Fast forward a year later, I had changed employers. By that time, ISO and most insurance carriers had either modified the wording of the war exclusion or developed a standalone terrorism exclusion. In 2002, along comes the Terrorism Risk Insurance Act. Initially intended as a temporary but has now been extended to the year 2027. The act required insurers to offer coverage for property, general liability, auto and umbrella coverage in return for reinsurance provided by the federal government.
Premiums for TRIA coverage was based 3 tiers depending upon whether the geographic location was considered a target area for further attacks. Generally, cities like San Francisco and New York were thought to be higher risk areas while other like Fort Wayne, Indiana considered lower risk.
However, even with the backstop provided by TRIA, insurance carriers found major aggregation of values that outstripped their capacity. The carrier I was working with began to track aggregation of exposures by zip code. In some cases, we were forced to lay off some limits on larger property exposures in major metropolitan areas. For example, on large commercial renewals, we would offer $25,000,000 in limits rather than $50,000,000.
It was maybe a year later, we added terrorism to our catastrophe modelling software. The software modelled the level of terrorism risk by tracking accumulating values based on distances between the locations and measured potential increased hazards by proximity to potential site whether it was Disneyland or the Dan Quayle Vice Presidential Library in Huntington, Indiana.
I found it odd we were putting faith in modelling software that modelled terrorism. Unlike earthquakes, hurricanes, tornadoes, and hail storms where there was a plethora of scientific data enabling probability calculations based on historical event, there had only been two major terrorism events in the United States and one of those was a domestic attack. When I raised the question, I was told the modelling was based on opinions submitted by renown experts on terrorism. Looking backwards, I guess the experts were wrong as terrorism has not been a significant property loss generator.
Now in 2021, coverage for terrorism is widespread, relatively easy to purchase, and at a low cost. There are some classes of business that may still present challenges with placements because of elevated class exposures with higher values, high visitation, and concentration of people. But for the most part, it is not very expensive. My guess is even without TRIA (now TRIPRA), we would find coverage for terrorism events for both property and liability readily available.
Since the September 11th attacks, there have been some small terrorism events which were inspired by foreign organizations but committed by Americans including the bomb attacks at the Boston Marathon in 2013. However, none proved significant enough to impact the insurance industry. In addition, law enforcement and national intelligence agencies have proven a level of adeptness at identifying and thwarting attacks. While the threat of a major terrorism attack still exists, the insurance industry has turned its attention back to managing capacity to natural disasters as Mother Nature appears to have far greater capacity than Al Qaeda or ISIS ever or will ever have.
In 2020, Mother Nature struck again unleashing Covid-19 on the world. Unlike September 11th, it would appear the insurance industry was better prepared for Covid. The challenge for the insurance industry will be to identify methods and adapt to manage risks posed by future pandemics. But that is another article!