Terrorism risk shifting towards business continuity, physical security: Aon

Risk more weighted on business interruption than property damage

Terrorism risk is evolving from a focus on property damage and business interruption, towards a focus on business interruption and physical security, CatIQ Catastrophe Conference delegates heard in Toronto on Thursday.

The shift is in response to an increased frequency and attritional nature of mass casualty terrorism attacks that have occurred over the last 24 months, said Scott Bolton, director of business development and network relations at Aon Risk Solutions.

“Most modern terror insurance policies originated from the mid-1990s, in response to Irish Republican Army bombings in central London,” Bolton said. “The IRA would call in warnings of attacks, evacuations followed, the bomb would explode, and there would be massive property damage, massive business interruption, but very few casualties. When we talk about terror coverage, we talk mostly about a property damage insurance and business interruption insurance program, full stop. It’s a hard thing to say but, terror insurance policy doesn’t care about deaths because it doesn’t respond to deaths that may happen due to terrorism risk,” he said. “Now, clearly, we’re shifting… to the mass casualty space. There could be zero impact on property, but from an insurance perspective, the impact could be much broader when you start seeing deaths, and injuries, and the impact on the lifelines of people: medical, benefits, potential liability – for example if businesses plan poorly, or their response was poorly managed on a mass casualty issue.”

Bolton said current innovation is addressing the gap between the core of terror insurance programs and the actual impact of such attacks, that may include little property damage.

“Innovation in the insurance space is focusing more on how we recognize that business interruption is the biggest chunk of what is coming out, and how do we help clients get access to revenue protection from business interruption when there may be no or modest property damage,” he said.
“We can’t keep having the conversation around property damage and business interruption. We have to start looking at the impact on life, liability and all those other things that mass casualty attacks bring.”

Brokers need to help businesses “understand how they are exposed to the peril and how terrorism can touch their property, people and operations”. “Yes, terrorism insurance is all about PDBR (property damage and business interruption) but, you’ll be remiss not to start talking about other things that terrorism attacks impact, things which are fundamentally important to the good of the operation and resilience of your clients’ business.”

“Understand the exposure, understand the gaps, and recognize the value in mitigation, in order to have a more articulate solution for a client.”

Bolton said the industry should go about terror insurance differently, as “it’s a more complicated issue than ever before.”

He said the solution lies in looking across a number of insurance lines.

“There is a challenge from the underwriting and reinsurance community, due to it [terror risk] crossing a number of insurance lines, it becomes that much harder to find an articulate risk transfer solution. We’re so silo’d into property, casualty, life, benefits. And not focused enough on where they all meet. But there are innovations that are beginning to recognize the attritional, cross-class nature, and finding solutions that fit those gaps. As a broker, it’s on our shoulders as much as it is on the underwriting community: let’s look at ways that we can work together, engage more with clients across industries, in order to understand where the gaps are coming from, and be more responsive as an industry.”

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