Recent Shift in Terrorist Focus to Economic Upheaval Requires Expanded Business Interruption Cover
In the wake of recent terror-related attacks, the insurance industry must expand its role of supporting the financial resilience of economies. This includes further clarifying the industry’s position alongside government-sponsored terrorism pools, according to Emma Karhan, Managing Director, Guy Carpenter.
“The recent actions of Daesh mark a shift in the focus of terror-related attacks,” asserts Ms. Karhan, “with a focus on causing significant economic loss and long-term disruption in addition to the loss of life, instilling widespread fear and driving community division. The attacks in Brussels targeted major infrastructure components, while the Paris attacks struck at key aspects of Western culture such as restaurants, bars and music venues, each causing major financial disruption.”
This shift in tactics to focus on causing increased economic damage requires the insurance industry to reassess its position. “The industry needs to look beyond what it currently deems the insured loss component of a terror-related attack and consider the wider reaching and longer-term financial fall-out,” says Ms. Karhan. “The potentially extensive business interruption repercussions from these attacks are not being adequately covered by the market currently and this needs to be addressed.”
Highlighting a study on the economic impact of the Paris attacks of November 13, 2015 by the Centre for Risk Studies at the University of Cambridge, Ms. Karhan says: “The report estimated the potential financial loss to the country’s GDP by the end of 2015 at USD 9.5 billion, with the figure rising to USD 12.7 billion two years post event due to the domino impact on additional sectors of the economy. The aftermath of these events can be particularly challenging for smaller companies and sole-traders. The terrorist attacks of September 11, 2001 in the United States left thousands of small- and medium-sized enterprises fighting for their economic survival. This is where the insurance industry needs to assume a more prominent role - providing immediate financial support to those businesses facing disruption and imminent closure.”
However, expanding such coverage requires a more granular level of insight into the direct and indirect impacts of terrorist attacks. “Whilst we can never fully understand the behavioral factors underpinning terror attacks,” Ms. Karhan believes, “we can look to more accurately calculate the financial impact through a better understanding of the physical damage caused and the subsequent business interruption and liability losses. At Guy Carpenter, we have been working to develop models specifically designed to assess the damage radius and impact field and also to generate reasonable target scenarios that reflect the potential impact of an event, for example, the size of a bomb/device and particularly the accessibility of the target.”
As the (re)insurance industry better defines its capability to provide expanded coverages, this will help establish a clearer division of responsibility between industry and government in mitigating the financial losses post event. “The role of the (re)insurance industry is designed to help mitigate economic disruption post loss, whether that be at the individual business or sector level,” states Ms. Karhan. “Where the government-backed terror pool structures come to the fore is by providing significant financial defenses to withstand the large-scale, shock events with the potential to destabilize economies. By clarifying and more closely aligning the complementary roles of government and the (re)insurance industry, our contribution to societal resilience will be greatly enhanced through a more unified response to the threat of terrorism.”