June 16th, 2010

Terrorism - Reinsurers Standing By, Part II: Risks, Threats and Exposures

Posted at 1:00 AM ET

David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President

The threat posed by terrorism has changed significantly since the catastrophic events of September 11, 2001, but it remains a constant and serious risk with global recorded terror incidents at historic highs. The nature of the risk is wide-ranging, with many countries threatened by international groups and domestic terrorism. Certainly, the threat posed by fundamentalist Islamic terrorists has changed a great deal since 2001. For insurers with terrorism risk on their books, it is important to understand how the terrorism threat has evolved, the varying risks in different regions and what developments are likely in 2010 and beyond.

Changing Threat

Global terrorist activity soared following Allied military operations in Afghanistan and
Iraq. Attacks increased dramatically in both these counties following the deployment of
coalition combat troops. In Afghanistan, attacks jumped from 150 in 2004 to more than 1,100 in 2007, according to the National Counterterrorism Center (NCTC). In Iraq, meanwhile, the number of attacks increased from 930 in 2004 to more than 6,600 in 2006 before subsequently falling to around 2,450 in 2009.

Other countries also witnessed a big jump in terrorist activity between 2004 and 2005 and the number of deaths doubled from 2004 to 2008 (see Figure 1). Pakistan in particular saw an increase in terrorist activity as al-Qaeda supporters moved across the Afghan border into the country. Attacks in Pakistan quadrupled between 2006 and 2008 (from 372 to 1,838). The core al-Qaeda group based in and around the Federally Administered Tribal Areas (FATA) of Pakistan remains one of the most significant security threats to the Western world. 


Source: National Counterterrorism Center

However, developed countries have suffered relatively few major terrorist attacks since the events of September 11, 2001 as counter-terrorism measures implemented across the world meant international groups, such as al-Qaeda, were less capable of orchestrating large-scale attacks.

Before the attacks of September 11, 2001, transnational groups, and al-Qaeda groups particularly, had a well organized and centralized leadership that enabled them to plan large-scale and spectacular attacks. Since then, military operations in Afghanistan, increased security and a shortage of funds and safe havens in which to train have hit al-Qaeda’s ability to plan attacks centrally. Events over the last few years indicate the threat has become more localised with attacks focusing on softer targets such as transport networks and hotels, a development that has implications for the (re)insurance industry.

Nevertheless, the threat remains, with individuals or autonomous groups aligned to the aims of al-Qaeda continually planning attacks. Around 60 major plots have been foiled in the United States and Western Europe since the attacks of September 11, 2001. While al-Qaeda is the focus of the media’s attention, the more recent plots and attacks in developed countries have involved other radical Islamist groups and individuals. Many of these cells and individuals may share al-Qaeda’s belief, or may have been galvanized by the movement’s sentiments, but their activity has not been financed or directed by the group.

Post September 11, 2001 Attacks

Despite the improved security in the developed world, some terrorist attacks have been successfully executed since 2001. Governments’ crack down on the finances, training and capabilities of terrorist groups has seen a shift to softer targets. For insurers, the most significant attacks following the events of September 11, 2001 include the Madrid bombings of 2004, the London attacks of 2005 and the Mumbai shootings of 2008.

The Madrid attack saw 191 people killed and 1,800 injured after ten bombs exploded on four separate commuter trains during rush hour. Estimates at the time of the incident said the cost of the attacks would be around EUR93 million (USD125 million) (1). A similar attack took place in London in 2005 when four co-ordinated explosions hit the city’s transport network on July 7 during the morning rush hour. Fifty-two people were killed in these attacks while another 770 were injured and the economic cost was estimated at GBP1 billion (USD1.5 billion) (2).

In the Mumbai attacks, more than 170 people were killed and at least 300 injured when a team of militants armed with explosives and guns caused extensive damage to several tourist sites in the city. Ten highly trained militants carried out the attacks, targeting sites that included three hotels (Taj Mahal Hotel, Oberoi Hotel and Trident Hotel), a popular café (Leopold Café), a major railway station (Chattrapati Shivaji), a hospital (Cama) and a Jewish center (Nariman House). The General Insurance Corporation of India said insurance claims from the three hotels alone would likely reach USD110 million. Security officials in India said the attacks were carried out by the Pakistan-based Islamic militant group, Lashkar-e-Taiba, and they warn the organization continues to pose a threat to the country.

Terrorism insurance pools existed in all three countries at the time of the bombings, and each respective pool paid some of the claims from the attacks. Although this helped limit the impact on the private market, the attacks well illustrated the threat posed by terrorists and the potential costs involved. Although the attacks in Madrid, London and Mumbai hit softer targets, they highlighted the risk to (re)insurers, especially if larger assets were targeted or if weapons of mass destruction (WMDs) were used.

Terrorism Risks

Unlike some other perils, (re)insurers struggle to quantify the risk posed by terrorism due to its unpredictable nature. The human element means the nature of the threat is forever changing as groups relocate and adapt their tactics in response to counter-terrorism measures. However, there are some steps (re)insurers can take to improve their risk awareness.

Monitoring world events and the location and number of foiled attacks can help (re)insurers understand the risk. Recognizing how counter-terrorism effectiveness varies from country to country is also relevant. Region is another important factor in determining the risk. The threat level is different in each country, and some countries even have regional differences. In Spain, for instance, the domestic terrorist risk is concentrated in northeastern regions as the Basque separatist movement, ETA, concentrates its attacks on government assets in that region. Therefore, (re)insurers are increasingly using services and expert advice to monitor global developments.

Maplecroft, an organization that assesses global risks for companies and investors, released a Terrorism Risk Index (TRI) in February of 2010 that revealed the countries most at risk from terrorist attacks. The index measures not only the risks of an attack, but also the probability of mass casualties occurring. The results are shown in Figure 2 (3).


Source: Maplecroft - please contact Maplecroft at info@maplecroft.com for the full Terrorism Risk Index

To provide a comprehensive picture of worldwide terrorism risk, Maplecroft analyzes terrorist incidents for their frequency, intensity and number of victims, plus the proportion of attacks that were ‘mass-casualty’ in each nation. A country’s historical experience of terrorism is also factored in along with threats made against it by groups such as al-Qaeda.

According to the TRI, even though the terrorist situation in Iraq has improved, the frequency, scale and human impact of attacks still makes it the most extreme risk country for terrorism, with nearly 4,500 civilians killed in 2009. Afghanistan (2), Pakistan (3), Somalia (4) and Lebanon (5) top the ranking of 196 countries and are rated as extreme risk nations, along with India (6), Algeria (7), Colombia (8) and Thailand (9).

The Philippines (10), Turkey (14), Russia (15), Israel (17), Yemen (22), Nigeria (24) and Spain (34) are all rated as high risk countries, while the United Kingdom (41), China (43), United States (46), France (56), Greece (57) and Saudi Arabia (61) are considered medium risk. Countries rated at low risk include South Africa (80), Germany (81), Japan (88), Italy (101), Canada (116) and Australia (120).

Ungoverned Territories

It is interesting to note that Maplecroft’s TRI has both Somalia and Yemen showing an increasing trend of terrorist activity. Both countries are deeply unstable and the rise of insurgents in such ungoverned territories is becoming increasingly perilous. The growth of ungoverned areas such as these and the FATA has heightened the level of global terrorism as it allows groups to function in relative security.

Somalia has been without an effective government since 1991 and the military has long been fighting insurgent groups for control of the country. The most prominent insurgent group in Somalia is al-Shabab, which has declared allegiance to al-Qaeda. As al-Shabab continues its fight to win control of Somalia, concerns are growing over its ability to execute its threats to attack neighboring countries and further destabilize the region. The long-standing absence of authority in Somalia has also led to Somali pirates becoming a major threat to international shipping in the region.

Yemen entered the news earlier this year following the attempted bombing of a Northwest Airlines passenger plane over Detroit on December 25, 2009. Officials said Yemen-based al-Qaeda in the Arabian Peninsula (AQAP) had armed and trained the accused bomber, highlighting the danger terrorist groups in unstable countries pose. AQAP has vowed to attack oil facilities, foreigners and security forces as it seeks to topple the Yemeni government and the neighboring Saudi monarchy. The group has carried out attacks in Yemen and Saudi Arabia, including an attempt to assassinate the Saudi Arabian Security Minister in August of 2009. Its overt call to attack transport networks in the West also poses a serious danger, prompting the international community to pressure Yemen’s government to take action against the
group. The Yemeni government has significantly increased its counter-terrorism operations but security experts say AQAP remains a threat. The attempted assassination of the British ambassador to Yemen in April of 2010 fueled concerns that the country is becoming an al-Qaeda haven.

Insured Exposure

Terrorism risk therefore varies considerably by country. This is also true when considering exposure accumulations that exist within many countries. Demand for terror (re)insurance cover in major metropolitan areas is much higher than remote towns simply because there is a greater concentration of exposures.

Terrorists attack targets of opportunity. Although it is certainly possible that an attack could occur anywhere, as the attempted bombing of a restaurant in the small English city of Exeter in 2008 demonstrated, the vast majority of attacks have been in large urban areas. Terrorists aim for widespread destruction and media coverage when planning their attacks, so it is fair to assume large cities such as New York, San Francisco, Washington D.C. and London are likely to top their target list.

The location of exposure can also influence (re)insurers’ decision making. For example, insurers offering terror cover in a low risk area may decide to retain much of the risk while an insurer placing business in high-risk areas is more likely to seek reinsurance. However, events can quickly change, with security levels constantly shifting in various locations and industries.

The (re)insurance industry, therefore, needs to monitor and react quickly to the changing global geopolitical climate. Threats can arise quickly, as recently demonstrated when Singapore issued a terror alert in March of 2010 for oil tankers operating in the Malacca Strait. Security analysts say oil facilities are prime targets for terrorists as they seek to achieve widespread publicity.

Weapons of Mass Destruction Threat

The aim of achieving maximum publicity and destruction inevitably leads to the threat posed by WMDs or a nuclear, biological, chemical or radiological (NBCR) attack. While these sorts of attacks are more difficult to achieve, terrorists undoubtedly pursue them. Indeed, US government officials warn that al-Qaeda, and groups aligned to it, have been seeking material for a nuclear bomb for more than 15 years.

At a nuclear security summit in Washington D.C. in April of 2010, President Barack Obama said the biggest threat to US security is the possibility of a terrorist group obtaining a nuclear weapon. He said groups like al-Qaeda would not hesitate to use nuclear devices and the effect would be devastating if successfully executed.

A US Senate report published in 2005 by Senator Richard Lugar (4) said the possibility of a terrorist WMD or NBCR attack is high and increasing over time. Experts interviewed for the report estimated that the possibility of a nuclear attack within ten years (2005 - 2015) was about 20 percent. Similar probability estimates for the risks of a biological or chemical terrorist attack were given while the report saw the risk of a radiological terrorist attack as significantly higher, at 40 percent over the ten year period.

The threat of a NBCR attack by international terrorist groups is further heightened by the concern over the security and whereabouts of existing weapons and material, particularly in the former Soviet Union. A report by the UK government in March of 2010 concluded that the threat of a terrorist attack using nuclear or chemical weapons is rising, and “the United Kingdom does face nuclear threats now.” (5)   The document said the threat of a NBCR attack is increasing because there has been a significant increase in the trafficking of material that can be used in radiological and, conceivably, explosive nuclear weapons. The International Atomic Energy Authority (IAEA) recorded 1,562 thefts and losses of potentially lethal material worldwide between 1993 and 2008, mostly in the former Soviet Union, and two out of three have never been recovered (6).

(Re)insurers have responded to this threat by offering a number of standalone NBCR insurance solutions. Historically, insurance cover for NBCR attacks was limited and expensive. However, an increasing number of (re)insurers have entered the market over the last few years, offering new solutions for various large-scale risks such as airports, industrial plants, sports stadiums and shopping centers. Businesses in all industries are now considering NBCR cover and the costs vary depending on a number of factors, including the geographical spread of risk, the location and type of exposure, proximity to other risks and the program’s structure (e.g. limit and deductibles).

Significant Developments in 2009

Governments around the world continue to confront terrorism and recent events underscore the importance of their efforts. 2009 saw an increase in attempted attacks in the United States, with five publicly documented alleged plots. In continental Europe, there was an attempted attack in Italy and hundreds of arrests were made for a range of terrorist offenses in several other countries, notably Spain and France. In the United Kingdom, more than 200 arrests were made in the 12 months to September 30, 2009, leading to charges being brought against 66 people.

Not all attacks were foiled. The unsuccessful bombing of a Northwest Airlines passenger plane over Detroit in December of 2009 occurred when Umar Farouk Abdulmutallab allegedly attempted to detonate explosives strapped to his body as the aircraft made its landing approach over the city. In an effort to avoid detection, intelligence officials said Abdulmutallab spent less than half an hour at Lagos Airport in Nigeria, where he boarded the flight to Detroit, via Amsterdam. He also used explosives that were not detected as he passed through airport security in Lagos and Amsterdam.

Domestic Terrorism Risks

While international terrorism will continue to be the focus of (re)insurers’ attention through the 2010s, domestic terrorist attacks should also be monitored. There have been several highprofile domestic attacks recently, with bombings in Russia, Northern Ireland and Spain, while the military defeat of the Tamil Tigers in Sri Lanka in 2009 was an important development.

The co-ordinated suicide bombings on Moscow’s Metro system in March of 2010 killed 40 people and injured more than 60 others. Security officials blamed the bombings on Islamist rebels fighting for independence from Russia in Chechnya. Security experts warn more attacks could come, with shopping centers, public transport and assets in Moscow and St. Petersburg likely targets.

In Northern Ireland, the Real IRA detonated a car bomb outside MI5’s headquarters in
County Down in April of 2010. The attack came after a spate of small-scale dissident Republican bombings and was timed to coincide with the transfer of policing powers from London to Belfast. Senior police officers said they now considered the risk from dissident Republicans to be at its highest since the Belfast Agreement was signed in 1998.

Spain, meanwhile, continues to confront ETA separatists fighting for a sovereign Basque state. Attacks against judicial and military targets have continued over the last few years and show no sign of abating. However, increased co-operation between Spanish and French police have disrupted ETA’s leadership and structure and attacks have gradually fallen over the last decade.

Overall, the threat from terrorism, both transnational and domestic, is likely to continue for the foreseeable future. Events over the last 10 years have shown that terrorism poses a risk to the (re)insurance industry as groups continue to plan and execute attacks in developed countries. The (re)insurance market, therefore, needs to ensure that it continues to manage and adapt to the changing terrorism landscape.

Click here to read Terrorism - Reinsurers Standing By, Part I: Introduction »

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1 Swiss Re Sigma Report: Natural Catastrophes and Man-Made Disasters 2004

2 Swiss Re Sigma Report: Natural Catastrophes and Man-Made Disasters 2005

3 Maplecroft has also developed the Localised Terrorism Intensity Risk Index which, maps all reported terrorist attacks down to 100 meters to provide a sub-national picture of terrorism risk in 196 countries

4 The Lugar Survey On Proliferation Threats and Responses

5 The United Kingdom’s Strategy for Countering Chemical, Biological, Radiological and Nuclear Terrorism

6 http://www-ns.iaea.org/downloads/security/itdb-fact-sheet-2009.pdf


Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office:  1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC.  MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies.  This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. 


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