How Insurance Is Morphing With the Terror Threat: QuickTake Q&A


Medics deploy at the scene of an explosion during an Ariana Grande concert in Manchester, England on May 23, 2017.

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When terrorists strike in Tehran or London, in Paris or Manchester, England, the toll typically is measured by the lives lost and injuries caused. Certainly that’s the gravest tally. Yet terrorism extracts a wider cost to victimized communities in terms of economic waste -- the lost productivity of those killed and wounded, the expense of rehabilitating and caring for the injured, damages to property, income lost to disrupted commerce. Insurers, who make sure such risks are widely shared, have had to adapt their policies, and they increasingly lean on government backing.

1. Do standard insurance policies pay for terror damages?

Typically yes, if the damage is to buildings and vehicles owned by individuals. Coverage of business properties has become more complicated. In most Western countries, insurers these days provide that kind of coverage only with government help.

2. Why is that?

U.K. insurers began excluding terrorism damages from ordinary commercial coverage after the Irish Republican Army, in 1992, exploded the biggest bomb in London since World War II, destroying one building and damaging 15 others in the city’s financial district. Insurers in most other countries did the same following the terrorist attacks on the U.S. by al-Qaeda on Sept. 11, 2001, which killed 2,977 people, destroyed two skyscrapers and four airplanes, and smashed the Pentagon. Commercial-property insurers worried that potential claims from future attacks could exceed their capital. Their fears were exacerbated by reports that al-Qaeda sought chemical, biological and nuclear weapons.

3. How did insurers adapt?

With government help, they formed so-called terror pools, a means to offer terrorism coverage to businesses. If damages paid out by these pools, which are often funded by insurers, exceed their reserves, the government fills the gap. Typically, the pool is required to repay the government with future revenue. Such pools include Pool Re in the U.K., the Terrorism Risk Insurance Act (TRIA) in the U.S., Extremus Versicherungs-AG in Germany and Gestion de l’Assurance et de la Reassurance des risques Attentats et actes de Terrorisme (GAREAT) in France.

4. Does coverage backed by pools have limits?

Yes. TRIA in the U.S., for example, only pays if officials declare an event to be a terrorist act and aggregate property and casualty insurance losses from it exceed $5 million. A risk that might be excluded from a pool’s coverage is an interruption of business -- for example, if a company can’t operate because it’s within a security cordon after an attack or because its supplier has been hit. Germany’s pool limits overall payouts to 10 billion euros ($11.3 billion) per year while the U.S.’s has a cap of $100 billion for 2016 rising to $200 billion by 2020 and beyond. To fill such gaps, some insurers offer specialized terrorism insurance. They include units of American International Group Inc.XL Group Ltd. and Lloyd’s of London.

5. What about coverage for death and injury?

Typically, terror isn’t excluded from life and health insurance coverage. Yet some insurers exclude or limit payments for terror attacks that occur in a war zone. Biological, chemical, nuclear and radioactive attacks may also be exempt from coverage. As always with insurance, the details of the policy matter.

6. Is insurance the only source of compensation?

Governments typically help out where insurance doesn’t apply. After last year’s truck attack on a Christmas market in Berlin that killed 12 people and injured more than 50, the German government made payments to victims and their survivors to step in for costs that weren’t covered by insurers, including funeral expenses and lost income and pensions for those who had lost a spouse or parent. In the U.S., a victim compensation fund was created after the Sept. 11 attacks for those who were injured and for the survivors of those killed.

7. How costly could a terror attack be?

That’s hard to quantify. But a worst-case scenario of terrorists using a weapon of mass destruction in a crowded city such as New York could well produce damages exceeding the capital available in the insurance industry. So far, Sept. 11 resulted in the largest payout by the insurance industry for terror damages, producing $43.6 billion in property, life and liability insurance claims, which is roughly the gross domestic product of Slovenia. That made it the second costliest insurance event in history, second only to 2005’s Hurricane Katrina, which cost the industry $49 billion. The second-most costly terror-related claim for insurers was the 1993 Bishopsgate truck bombing in London by the Irish Republican Army. That led to property damage claims of about $1.2 billion. Pool Re paid for that and still counts it as its largest claim.

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