06 October 2004

U.K. - Insurers Threaten to Pull Terrorist Cover -Continued

In last month’s Survive newsletter Patrick Roberts commented on an interesting article in the Times about insurance companies proposing to deny cover for terrorist attacks to businesses unless they can demonstrate a satisfactory level of business continuity planning. In response to this, Peter Higgins from 1SecureAudit sent us a few thoughts from a white paper the company has written on similar subjects:

In order to introduce new changes in process or design that impacts the physical or operational aspects of critical infrastructures (to reduce terrorism risk), it is important to better understand how these change levers can provide the incentives for owners. Being forced is never as appetizing as being induced to do anything. In order for changes to take place, the environment must reward investments in preparedness and safety. Consistently the conversations are not about “if” something is going to happen, it is about “where” or “when” it is going to happen. Therefore, it is imperative we initiate a proactive hedge against the inevitability of a loss event occurring in the future. First however, we must understand the character of terrorism risk in critical infrastructure and some of the anti-terrorism tools currently available to help manage that risk.

The recognition by insurers that owners will continue to invest in terrorism risk reduction and building safety with the proper incentives is vital to overall risk management of critical infrastructures. The assessment of terrorism vulnerability in key structures identified as soft targets can be a key component of the rating of risk for a specific structure. In order for owners to benefit from the potential of reduced premiums from direct insurers they must be able to demonstrate a combination of risk mitigation measures and programs to help improve the survivability of the infrastructure or to reduce it’s vulnerability to certain threat profiles. These need to be exercised on a continuous timetable with extensive documentation, training and reporting.

In order for insurance brokers to accurately represent their buyers mitigation programs and measures to the direct insurers they must have a foundation of knowledge about the structures physical vulnerabilities. However, even more essential is the understanding of the operational and human attributes of the building that are contributing to the proactive tactics to prevent losses and further exposures to potential terrorism risk. If this step takes place, the insurers can better evaluate these operational and human elements to determine the value and effectiveness of these tactics so that they can be considered for premium reductions. The building itself, two miles from the White House, has little chance of moving outside the high-risk zone for terrorist events. The only methods for reducing risk exposures are to dramatically impact the operational and human elements of the building to mitigate hazards and increase the survivability of the people and systems that are resident. Insurance losses resulting from a catastrophic events fall into several key areas:

• Property losses to the target building and adjacent structures, incurred by the owners themselves.

• Liability losses for claims due to inadequate procedures for evacuation or fire prevention incurred by building owners.

• Workers compensation, health and life insurance losses resulting from death or injury of tenants or visitors to the building.

• Business income and rent loss due to inability to occupy the structures incurred by tenants and owners.

• Financial losses by various lenders and investors in mortgage-backed securities associated with the mortgage notes themselves.

The real estate finance community and building owners associations have been subjected to a substantial debate since 9/11 about the exclusions of Terrorism Risk insurance. The real estate and lending environments in target cities such as New York, Washington, DC and Los Angeles have been in turmoil over the unavailability or terrorism risk insurance at reasonable prices.

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