Terrorism risks in property insurance

Terrorism risks in property insurance and their insurability after 11 September 2001

Risk perception

Terrorism risks in property insurance and their insurability after 11 September 2001 “Anyone intending to cover terrorism losses must consider every eventuality. The terrorists themselves do the same.�

Terrorism and insurance, Swiss Re, 1993

Contents Introduction Section 1 What is terrorism?

How can terrorism risks be identified?

How can terrorism risks be assessed?

How have terrorism risks changed?

How must terrorism risks be viewed today?

Who can be affected by terrorism risks?

How can terrorism risks be handled?

No simple answers or ready-made solutions

5

7 7 8 9 12 12 13 13

Section 2 Has all been said already?

“Yes” to the inclusion of terrorism in property and business interruption insurance, “but …”

A new dimension Insurability prior to 11 September 2001… … and insurability thereafter Randomness Assessability A pragmatic approach towards assessing the expected loss burden Scenarios Risk community and solidarity The role of the state The new reinsurability A question of definition Lest we forget …

16 16 19 19 20 20 21 23 23 24 26 26

Appendix 1: Specific terrorism insurance schemes for European countries Appendix 2: TRIA 2002 – Key features

28 31

15 15

Introduction When the World Trade Center collapsed on 11 September 2001, New York City was shaken at its core. The South Tower caved in first, followed 29 minutes later by the North Tower. The streets of Manhattan were plunged into sheer chaos.

The images of 11 September still haunt us today. How much worse must these images be for those who lost a relative or a friend in the horrendous attack!

While our profession requires us to place the focus of this publication on the material damage caused on 11 September 2001 and the repercussions for the insurance industry, our thoughts remain first with the victims of this attack and their relatives.

This publication is not a paper on terrorism as such. No attempt is made to explain the reasoning behind the phenomenon or to discuss effective ways of eradicating it. The issue concerns the possible consequences of terrorism, ie terrorism risks.

The first section comprises a systematic application of risk management principles and, accordingly, examines the spectre of terrorism and how terrorism risks can be identified, assessed and handled by insurers and reinsurers.

The second section is concerned with risk transfer, ie insurability. In this context, it must be borne in mind that 11 September 2001 brought an entirely new dimension to terrorism risk which had previously been insured automatically as part of property insurance. This prompted the need to re-examine the issue of insurability, a subject which had already been broached in the nineties.

5

Lockerbie, 21 December 1988

6

Section 1 What is terrorism?

The term “terrorism” is used for the strictly reprehensible use of violence to achieve certain goals. Perpetrators of such attacks would not call themselves terrorists: they see themselves as soldiers or fighters for a just cause for which they occasionally even gain support. Attackers and victims will thus never reach consensus on whether a given attack is an act of terrorism or another form of violence, since they invariably view individual events from opposing angles.

From the victim’s point of view, terrorism is understood to consist of carefully and covertly planned illegal acts of violence against the existing political and societal order that shock the public at large.

This definition is geared to the democratic principle whereby the state holds the exclusive right to the use of force, which binds citizens to resolving any type of conflict in a non-violent and rational manner. Within its own territory, only the state, by means of executive bodies such as the police or military, is entitled to exercise force against individuals, albeit only to maintain public order and safety as laid out in accepted laws. Thus any act of violence not sanctioned by the state is clearly illegal.

Terrorism differs from common violent crime by its explicit intention to impact the public. An attack serves the purpose of instilling fear and insecurity in the society affected, and also to drum up sympathy for the attackers from their supporters.

“Normal” criminals are not interested in either of these two factors. Terrorist violence is never spontaneous and eruptive, it is the result of careful and targeted planning.

The structure of terrorist organisations sets terrorism apart from open warfare.

Terrorist cells or groups are too small to enter into open combat. As a result, their operations are invariably clandestine. However, there is always a danger that such underground organisations may be used as a means of warfare by one state against another.

Terrorism can be described in a host of other ways. It would be wrong, however, to associate it with race and ethnic origin or nationality, or to equate it with the political, religious or ideological causes that it is associated with, as these can also be taken up rationally. Terrorism is neither a specific quality nor an end in itself, but rather a certain means to an end.

How can terrorism risks be identified?

Terrorist movements are often rooted in criticism of the existing balance of power.

If this criticism is ignored, opposition forms and, if it fails to achieve the desired effect, extremist splinter groups may materialise and develop into terrorist cells – although this has been the exception to date. These terrorist cells start out by making threats of violence before catapulting themselves into the public eye with an initial series of attacks that are often limited to causing property damage.

7

It is at this point that the specific threat becomes evident to everyone; before this point, only those who concern themselves intensively with such political movements and follow their developments continuously would have been aware of the threat. This gives rise to the question: Could the attack of 11 September have been predicted? The answer is yes, and no.

Yes, because American targets have been affected by terrorists in the past. Specific American symbolic landmarks were identified as possible targets. Accordingly, an attack on the WTC could not be excluded as a risk.

No, because people believed that such a brutal direct attack on the general public simply would not happen. This trust is the cornerstone of social interaction, whether among nations or individuals. Without this basic mutual trust, any stranger is a possible enemy and therefore a potential threat.

Terrorist attacks are a targeted assault on public safety, while creating and upholding public safety is one of the key functions of a (state) community. Terrorism can only fulfil its aims in places where people feel safe – by shattering people’s faith in others, in the community and, especially, in the protection and benefits provided by the state. Free societies are particularly at risk from terrorist attacks, as their solidarity is driven not by coercion, but by basic values and rules affording security.

How can terrorism risks be assessed?

Terrorism differs from “normal” risks in that its claims experience cannot be extrapolated along a linear path. The frequency and severity of future attacks may change abruptly. Nevertheless, terrorism is by no means random. Terrorists plan and act in line with their own logic, according to which their attacks and the human loss and damage they cause are a means to an end. Their aim is to send shock waves throughout society as a whole, weakening its foundations and creating insecurity. In doing so, the attackers hope to bring about a change in society.

By following this cruel logic, it is at least possible to assess the relative probability of different scenarios occurring, for example, to identify which persons, groups or institutions are most at risk. Assessments are facilitated using a risk factor model developed by Swiss Re, which groups together the many different effects into three main factors: J J J

the terrorists’ intentions the terrorists’ potential the vulnerability of the society under attack

The terrorists’ intentions can be derived from their motives. While their motives may be “good” even from the victims’ point of view, their intentions are invariably “bad”, since they use violence to draw attention to their cause, spread insecurity among the public, destabilise the political situation and intend to weaken and in extreme cases even destroy a given society.

The terrorists’ potential depends on such factors as their technical, organisational and financial resources, and in particular on their mental structure and resolve.

8

The vulnerability of the society under attack is determined by its technical, economic, social and political stability, in other words, by the damage an attack of a given magnitude is likely to trigger, by the likely consequences and by the way in which the affected society deals with the situation.

The terrorists’ potential and the vulnerability of the affected society together reveal the maximum possible dimension of human loss and property damage that terrorists could cause in the worst conceivable case.

By combining the terrorists’ intentions and the vulnerability of the affected society, we obtain an indication of the intended loss dimensions, ie the damage terrorists consider necessary to achieve the targeted political effect. In the logic of terrorists, the more stable the society under attack is, the more painful the harm that must be done.

Terrorists’ intentions and their potential determine the possible frequency of the attacks. Terrorists will attack as often as it takes to achieve their intentions, but obviously not more frequently than they are able to.

The first practical conclusion of the model is that in order to assess terrorism risks, it is not sufficient to merely analyse the terrorists’ potential, ie to discuss, for example, whether a specific terrorist group is capable of deploying weapons of mass destruction. The terrorists’ intentions are the key issue. Therefore, in assessing such risks, the background of the terrorist group concerned must be examined thoroughly to obtain an understanding of their logic – however abstruse it may seem.

How have terrorism risks changed?

Have terrorism risks changed? Before we attempt to answer this question, we must first look at the evolution of the individual risk factors.

The motives behind terrorist organisations currently range from ideals of “creating heaven on earth” through “protection of animals from tortuous scientific experiments” to “defending democracy against new technologies and economic globalisation”. All of these are ultimately political motives. This is also the case with extreme religious fundamentalists, who propagate a non-secular model of society in which religion and politics form an inseparable whole.

The terrorist objective is always the same, namely to bring about a change in the existing social order. Likewise, the basic terrorist intention invariably remains the same: to provoke the representatives of a given social order into taking action which prompts a shift in public opinion away from the authorities in favour of the terrorists’ cause. The attackers are all too aware of the fact that their actions are considered immoral and illegal. Their intention is to portray their opponents as being even more immoral and less law-abiding than they are, ie that they, the terrorists, are the lesser of the two evils.

In the last century terrorist groups mostly tried to measure out the impact of their attacks: they had to be strong enough to force the state to act in response to its citizens’ call for protection, but not so brutal and devastating as to justify the state hitting back with full force. The terrorists’ first success came if they managed to trigger a political dispute in the affected society on how to respond to the given terrorist threat.

9

Oklahoma City, 19 April 1995

10

However, since the end of the East/West conflict at the latest, national political systems have been increasingly eclipsed by international and global structures.

Accordingly, in the same way as many terrorist groups in the 20th century tried to divide “their” society, some new groups are now trying to destroy the unity among communities of states in order to break their power.

As a result, the targets have changed: new or international terrorism no longer fights against national or social orders alone, but also against the western world and its values and beliefs as such. Attacks are carried out against the leading industrialised nations of the western world.

The magnitude of the harm that terrorists intend to cause is also likely to increase.

Whilst traditional national terrorists generally tried to limit the number of civilian casualties, there are indications that international terrorists deliberately target specific groups of the civilian population.

In the future, terrorists will continue to try and inflict as much suffering as possible on the society they are attacking, whether by claiming a large number of victims, destroying emotionally significant symbols or causing material or economic damage that will be felt on a national scale.

It can therefore be assumed that terrorists – if not the same ones that orchestrated the 11 September attack then others – will attempt to step up the scale of damage that such attacks wreak to gradually encroach on the “provocation threshold”, ie the point at which the state under attack is incited to retaliate with such force that other nations would disapprove, thereby splitting existing alliances.

This aggravation of the intended loss extent escalates terrorism risks clearly beyond the potential of terrorist groups, which is also increasing. Terrorist organisations may currently have comparatively easy access to large amounts of radioactive material, for example, which they could use for manufacturing dirty bombs.

However, it does not take sophisticated weapons to kill thousands of people, shock an entire nation and send the global economy reeling. As became painfully obvious on 11 September 2001, it is enough to (mis)use high-energy technological systems such as aircraft, trains or chemicals transporters as weapons. Any harmful impact that could be caused by an accident – however improbable – can be produced intentionally by terrorists seizing the associated technological system or sending it out of control.

Terrorists measure out the devastation their attacks cause. History shows that the scale of the intended harm has so far been “only” a fraction of the technical and logistical damage that could have been caused.

In this respect, it goes without saying that detailed attack scenarios must not be discussed in public. To provide an idea of the possible magnitude, however, a well-known example may be cited: a terrorist willing to die for a cause would be able to spread large (and easily obtainable) amounts of radioactive waste on the streets of a city and thus contaminate the entire city within a few hours.

If and when such devastating attacks will ever be carried out is merely a question of intent. The technical and logistical possibilities play only a subordinate role.

“Successful” terrorist attacks have so far been characterised by the use of the most simple methods possible. The decisive factor of their effectiveness is the determination of the attackers, which often borders on paranoia, especially if these are prepared to die for their cause.

11

How must the risk of terrorism be viewed today?

On the basis of known facts and judging by current discussion among experts, the question is not whether further terrorist attacks will be carried out, but rather when and where. Following the logic of terrorism outlined above, the scale of damage will tend to increase. This does not even require an especially high terrorist potential. Using the simplest of methods, terrorists could be in a position to destroy almost any building and any industrial plant. They are capable of razing entire districts to the ground and killing tens of thousands of people if, for example, they target a mass gathering. The scale of actual damage is effectively only limited by the “time” factor. It is hardly possible to repeat terrorist attacks at will within a short period of time as the state under attack will respond immediately.

And the greater or more severe the damage, the more vehemently it will retaliate.

It would therefore tend to be unlikely for an attack such as the one on 11 September to be repeated within a few months. Nevertheless, recurrence periods of one to two years could be conceivable.

There are three scenarios which are a particular cause of concern: J J J

the simultaneous occurrence of several large-scale hits similar to the one on 11 September; an attack with a far greater impact than the one on 11 September; the overreaction by a desperate terrorist organisation in the form of an act of self-destruction with the aim of causing the maximum damage possible one last time (“going out with a bang”).

At best, any realistic protection and defence measures may reduce the probability of such events, but not the potential scale of the damage.

Who can be affected by terrorism risks?

Anybody and anything, regardless of where they are, can fall victim to a terrorist attack, simply because they happen to be either in the “line of fire” or affected by the indirect consequences. In addition, the element of surprise is an essential part of the terrorism concept, which is why no individuals or objects are safe from attacks and their effects.

The targets that terrorists explicitly select for their attacks are essentially determined by three factors: the attractiveness of the target, the required effort and their typical method. These three elements are, in turn, influenced by the three main factors.

From a terrorist’s point of view, a target is attractive if its destruction shocks and harms society to the “desired” extent. To achieve this, the target must have a strong symbolic significance for the targeted social system and it must be known among the supporters of the terrorist movement concerned to ensure that they understand the message behind the attack.

The second important criterion for the choice of target is the terrorists’ modus operandi, and here in particular the public nature of terrorist attacks. Terrorists invariably emerge from their seclusion to attack in public. Their aim is to produce high impact images such as those that appalled the whole world on 11 September 2001.

12

In this age of mass communication, the target and type of attack are thus often selected to ensure that their consequences and effects are broadcast quasi live on television.

Of the targets which would be suitable according to this logic, terrorists will be likely to select those which are easiest to hit with the technical and organisational resources they have available, ie public facilities that are difficult to monitor and control.

How can terrorism risks be handled?

Terrorists are driven by motives and claims which politicians must influence and deal with. Meanwhile, it is the responsibility of state communities to weaken terrorist potential, and all the general public can do is protect itself against attacks as far as realistically possible and bearable, and at the same time attempt to curb its own loss sensitivity. In this respect, the same principles apply to the direct and indirect consequences of terrorist attacks as to any other loss event: the aim must be to contain the damage sustained by separating technical and economic dependencies and by establishing effective emergency and crisis management systems. Such systems were in place on and following 11 September and contributed decisively towards limiting the number of victims. Finally, the last line of defence is public spirit, ie the human ability to pull together in times of need.

Insurance can contribute under certain circumstances. As will be explained in the following section, it can help to distribute at least part of the loss burden caused by terrorist attacks across as many individuals as possible.

No simple answers or ready-made solutions The risk factor model we have mentioned shows that terrorists act in accordance with a logic of their own which must be understood to identify, analyse, handle and possibly transfer terrorism risks. While it is not suited for calculating terrorism risks, the model facilitates structured reflection on terrorism. It is designed to help decide whether existing protective measures for society are sufficient or whether it is necessary to introduce more specific individual safeguards, ie measures that are not applied generally because they impair the quality of life and hamper the freedom of movement.

Both in assessing risks and in deciding on the measures to be taken, it is important to consult with experts, whether from public organisations or private companies with a proven track record.

Even then, however, the protection afforded by such measures is very limited.

The main challenge is not to fall into the trap of denying or suppressing the threat on the one hand and not to break out in panic on the other. In any event, the related factors and mechanisms should be subject to sober analysis, and the search for solutions conducted with circumspection. This approach can play a key role in preventing terrorism from achieving its objectives.

There are no simple answers or ready-made solutions. Even so, terrorism is by no means random, but follows its own, albeit twisted logic. Being able to understand this logic is the first step towards managing terrorism risks better, even if they cannot be eradicated entirely.

13

Manchester, 15 June 1996

14

Section 2 Has all been said already?

The global economy has suffered a severe setback since autumn 2001, and the insurance industry, in particular property insurance, was hit harder by the terrorist attack on the World Trade Center than by anything else in its history. Although large international insurers and reinsurers have been evaluating major terrorism scenarios since at least 1972, in the aftermath of the attack during the Summer Olympics in Munich, even those who warned of a major event did not anticipate an attack such as the one on 11 September. Since then, not a day has passed without an article or analysis on all conceivable angles of the event and its consequences appearing in newspapers, magazines and trade press. When starting this project, Swiss Re therefore asked itself whether everything had not already been said on the matter. Should Swiss Re add more to the topic? After all, it had already published a focus report in February 2002, entitled “Terrorism – dealing with the new spectre”.

We came to the conclusion that some open questions and issues still remain.

After all, even if many of the measures agreed and implemented after 11 September 2001 in property and business interruption insurance and in reinsurance prove to be of lasting benefit, other issues may have been overlooked in the heat of the moment and still need to be examined today. Moreover, new ideas will add fresh momentum to the ongoing discussion.

“Yes” to the inclusion of terrorism in property and business interruption insurance, “but …”

The second part of this publication deals with aspects of the insurability and reinsurability of terrorism in property and business interruption insurance. In addition, the issue of “co-operation between the state and the private insurance industry” will be examined, even though – or perhaps precisely because – this issue has triggered politically motivated controversy in the media. In the following discussion, Swiss Re endeavours to maintain an entirely objective position, the aim being to establish the best possible insurance and reinsurance protection under the given circumstances. Insureds, insurers and reinsurers agree that a verdict of uninsurable would have disastrous economic consequences. While exposure to terrorism – vastly underestimated prior to 11 September – must be limited, a categorical “no” to terrorism insurance and reinsurance from a political and societal standpoint, cannot be the answer since this could be interpreted as terrorists’ victory over society and hence of the free democratic system.

In the case of the WTC loss, where investigations and claims settlement are still far from being concluded, reinsurers will bear an estimated 70 % of the total insured loss amount. However, in the future, terrorism losses will have to be spread across a greater number of shoulders. In fact, state support is just as necessary in dealing with “man-made disasters” as it is in the case of natural catastrophes of similar dimensions. Furthermore, the loss burden must be distributed more effectively and the exposure of the private insurance industry must be limited more strictly to ensure that terrorism risks remain insurable in the future. Bearing this in mind, reinsurers must, for example, question the common practice in proportional business of ceding on an MPL (EML or PML) basis, because although terrorist attacks may not count as “probable occurrences”, they must be taken into account in the future.

15

A new dimension As the saying goes, you can never really tell whether a natural catastrophe is insurable or not until after it has happened. Since 11 September, this can also be said of man-made risks. Direct insurers and reinsurers were suddenly confronted with a new dimension of terrorism risk – which had previously been included automatically in insurance cover – and responded by implementing an initial set of measures in subsequent renewals. Some of these were temporary measures, while others will stand the test of time. Basically, the task is now to come to grips with the new dimension of the “old” terrorism risk. It must be borne in mind, however, that different issues need to be solved for the various stakeholders. For example, direct insurers are obliged to comply with specific state regulations. At the same time, the accumulation problem – probably the most important aspect of insurability – primarily affects global reinsurers with large commitments from various sources. These accumulations must be identified and limited. This is precisely why sufficient attention must be accorded to protecting the reinsurers’ interests as well.

Insurability prior to 11 September 2001…

The spreading of fear and terror by underprivileged groups is almost as old as human history itself. Likewise, conspiratorial organisations with no official backing are known to have pursued their objectives by violent means throughout ancient history. The infamous assassins, for example, are one of the best-known early underground terrorist groups. Their activities in the 11th century were so brutal that the word “assassin” later became synonymous with murderer.

The term “terror”, in contrast, was coined during the French Revolution at the end of the 18th century. Originally, this term was used to describe both the reign of terror by the ruling Jacobins and the struggle – often considered legitimate – of organised terroristes against the blood-thirsty guillotiners.

One of the most famous and most consequential acts in the history of terrorism was the assassination of Austria’s heir apparent, Archduke Franz Ferdinand, by Serbian nationalists in 1914. This murder prompted Emperor Franz Joseph I to support the declaration of war against Serbia, which culminated in the First World War. In the 1980s alone, the US State Department registered over 30 000 terrorist attacks worldwide, including the devastating crash of the Pan Am Flight 103 over the Scottish town of Lockerbie. The attack on 21 December 1988, in which all 259 passengers and crew on board the Boeing 747 died, along with 11 Lockerbie residents on the ground, must be seen as a turning point in the history of international terrorism. A new peak was reached with the attack on the WTC and the Pentagon, and the crash of United Airlines Flight 93 near Shanksville.

16

It is not the first time in the history of property insurance that the insurability of terrorism risk has been questioned. However, discussions prior to 11 September tended to concentrate less on whether terrorism risks should be insured at all and more on technical coverage issues. For example, in a brochure on fire insurance published in 19861 Swiss Re proposed the following catalogue of measures for terrorism covers: J J J J J J J

specific exclusion from standard cover; selective options for inclusion by way of “special conditions”; adequate premiums which take into account adverse selection and rapid variability in the political situation; straight deductibles; liability limits (per event and/or annual limits); (reversed) burden of proof; the option of short-term cancellation.

On the evening of 10 April 1992, the City of London was rocked by an immense blast which could be heard 30 kilometres away. This explosion marked the start of the London City bombings, which continued in 1993 and 1996 in the Docklands and led to the formation of Pool Re in 1993. Pool Re is a private reinsurance carrier backed by the Treasury as reinsurer of last resort.

The extent of the damage caused by the blast in the area around St Mary Axe was starkly reminiscent of the bombings to which London was subjected during the Second World War. In the aftermath of these attacks, reinsurers in particular were quick to realise that record insured losses had been triggered by this manmade disaster (the figure for 1992 and 1993 later turned out to be in excess of USD 1.5 billion).

Prompted by the London City bombings, in 1993 Swiss Re published “Terrorism and insurance”, drawing almost identical conclusions as it had in 1986. Looking forward, it formulated its expectations thus: “It has become essential for the reinsurance industry to segregate terrorism risks from original business and grant non-proportional cover. (...) This would provide limited cover appropriate to the hazard on special terms, to be offered in politically stable countries at a premium commensurate with the substantial risk involved.”

Looking at the findings and priorities formulated in the 1980s and early 1990s, it becomes evident that the enormous loss potential of future terrorist attacks had been recognised, and that large reinsurers and international direct insurers had the best of intentions to make expected future terrorist attacks manageable from an insurance point of view. Unfortunately, neither the events described above nor any other major acts of terrorism (eg the first bombing of the World Trade Center in February 1993, the terrorist acts in Oklahoma in 1995 and in Manchester in 1996) were warning enough to prompt property insurers and reinsurers to undertake far-reaching action at an international level. Aided by the start of the soft-market cycle in the nineties, promising approaches soon petered out. How quickly even catastrophe losses fall into oblivion!

1 “Die Feuerversicherung im Wandel der Zeit”, available in German only

17

Washington, 11 September 2001

18

... and insurability thereafter Statements such as “terrorism is the new war” made by politicians and journalists in the days and weeks immediately following the attack on the WTC may be entirely understandable, but they also obscured the insurance-related facts somewhat. The international insurance community’s initial reactions to the event were therefore not always properly thought out. Some spoke of immediately excluding all political risks, others of private insurers withdrawing from property insurance business altogether. However, an examination of the terrorism risk since 11 September from an insurance theory point of view reveals that there is no fundamental incompatibility with the principles of insurability.

No one has expressed the principle of insurance in a more precise yet comprehensive way than Alfred Manes2: “Insurance is the mutual cover of a fortuitous, assessable need of a large number of similarly exposed businesses.”

Severe doubts were voiced regarding the criteria “fortuitous”, “assessable” and “mutual” after 11 September 2001. In our opinion, however, at least “fortuitous” and “assessable” can be used safely in the context of social and socio-political risks. The new magnitude of terrorism alone is not enough to change this fact.

War and civil war however stay uninsurable.

Randomness An event is considered fortuitous or random if at least the time and magnitude of the damage are unpredictable, or even the occurrence of this event itself, as is the case with terrorism risk. Of course, in the case of man-made risks, the randomness is of a different nature to that of natural catastrophes. For example, following the occurrence of a small or medium-sized terrorist attack, the probability of a second attack in the same geographical area increases rather than decreases. There are a number of reasons for this: increasing political tension, reprisals by rival groups and copycat attacks. In contrast, it can be assumed that major international terrorist attacks are many years in the planning, which means that an immediate, unprepared follow-up attack – at least by the same terrorist group – becomes unlikely.

At the end of the day, we must also take into account the fact that technological prevention measures can be rapidly mobilised to ward off man-made catastrophes, in opposition to earthquake and flooding.

Despite the “non-fortuitousness” described above, the terrorism risk fulfils the fortuity criterion, as it goes without saying that with all socio-political risks – from arson, riots and strikes to terrorism – randomness must not refer to the perpetrators and their malicious intentions but to the policyholders’ ability to influence events, ie to the so-called moral hazard.

2 As principal of the insurance seminar at the Berlin Business School, Alfred Manes taught insurance management from 1906 to 1935. In 1935 he was stripped of his professorship on account of his Jewish roots and emigrated to the US.

19

Assessability Following 11 September 2001, doubts were voiced whether the criterion of assessability – a function of both frequency and severity – could still be maintained for terrorism covers.

Looking back at the thirty years prior to the attack on the WTC, we can hardly maintain there was a lack of statistical material, given the large number of known and recorded small and large terrorist attacks (of which some 20 000 are acts of international terrorism). The books of large, international risk carriers registered enough claims of this type under fire and explosion losses to facilitate reasonable rating and premium assignment. Was the terrorism risk thus underestimated despite rising frequency and claims amounts? Without a doubt.

On 11 September 2001, we were confronted with a new type of terrorism for which we could not have been prepared. Even if we had extrapolated our statistical experience from previous years along more than just a linear path into the future, we would not have arrived at an event with such implications. Some of the reasons for this are: J J J J

the totally inconceivable lack of human respect on the part of the planners and the terrorists who carried out the attack; the unimaginable cold-bloodedness of the attack using innocent airline passengers – men, women and children – as human bombs; the concerted action carried out uncompromisingly and with totally devastating precision by kamikaze pilots; the intention of achieving maximum media impact.

For their part, the insurers did not anticipate: J J

an airborne attack using several passenger aircraft, nor an accumulation across various lines of business (general property, aviation, business interruption, liability, accident, life).

In short, the terrorist attack on 11 September 2001 assumed dimensions bordering on the limits of insurability. Even so, we believe that risks will continue to be assessable in the future. However, the insurance industry must rethink the fundamentals and develop existing, underused methods further. Firstly, this involves stepping up research in premium calculation models, a process that is still in its infancy; secondly, it comprises working with scenarios.

A pragmatic approach towards assessing the expected loss burden Indications of an appropriate risk premium can be obtained by comparing the WTC loss with global non-life premium volume. Even if the exact loss amount has yet to be determined, it is expected to find its level at under 10 % of global annual non-life premium volume. A comparison with the loss potential from natural perils is also useful: an estimated USD 75 billion of property values is currently insured against a severe earthquake in California. This amount corresponds roughly to the initial estimates for the overall WTC damage, and thus even exceeds the more recent estimates of USD 30–40 billion.

20

If the return period of a terrorist attack of the size of the WTC attack were to be “only� one year, then a 10 % loading on the current non-life premium should suffice. However, the limitations of cover which have become necessary since 11 September 2001 reduce the loss potential enormously. With such limitations, the losses of 11 September would cost property insurers and reinsurers considerably less than the current loss estimates. At the same time, claims from smaller insured terrorist events will also need to be indemnified, and the frequency of such events is much higher. Furthermore, we must accept that it is not possible to create an ideal worldwide risk-sharing community. This would not be justified, either, since private households, for example, are in effect exposed only to minor damage from flying debris, and the material assets at risk in industrialised countries are far greater than those in developing countries. Conversely, the risk-sharing community needs to be large and stable enough to finance the loss burden over a reasonable period of time.

To estimate the relative probability of occurrence for a number of loss scenarios, it thus makes sense to differentiate between the following criteria in property insurance: J J J J

personal lines, commercial and industrial insurance type of occupancy within industrial business geographical location (country; urban or rural) key brands and landmarks, along with buildings of a symbolic nature

On average, loading a few percent on the property premium should thus be sufficient. In special cases, however, a premium loading of 100 % or even more would be commensurate with the risk, depending on the specific number of insureds and the criteria used.

Admittedly, this approach is somewhat rudimentary, but when rating new risks, we always have to start at square one, and refine the rating process as time passes. Computer-based tools will be available in the near future, enabling the insurance industry to assess the terrorism exposure of individual risks or portfolios of risks based on the criteria mentioned above. However, estimates of the expected loss burden require a calibration of the relative probability of occurence, which will not be provided by these tools. Estimating the frequency of terrorist attacks will thus continue to involve assumptions.

Scenarios While scenarios are a proven tool for identifying and addressing different kinds of exposure, they have not yet been thoroughly tested regarding the effects of including terrorism cover in property insurance and related business interruption insurance. Nevertheless, they are able to furnish key findings on the suitability or necessity of special market solutions. The individual components of a scenario are: J J J J J

scenario identification (in terms of the assumed probability of occurrence and the assumed loss dimensions); identification of exposed risks and areas; the damage radiuses and degrees of destruction; quantification of loss potential (total loss, insured losses and shares underwritten); implementation – underwriting policy and underwriting.

21

New York, 11 September 2001

22

The most difficult step in this process is quantifying the loss potential, since key information may not be available on account of data protection and because tactics of co-ordinated wide-spread attack now also need to be factored in. As a result, the risk landscape is often modelled using assumptions and averages. Accumulation across the various lines of business also hampers the situation. Including business interruption insurance may create additional difficulties, such as contingent business interruption and denial of access coverages.

Risk community and solidarity In its original sense, the risk community – based on the principle of solidarity – is limited to grouping together individuals exposed to one and the same peril. Such risk communities are normally organised by commercial insurers who promise policyholders payment of future insured losses in return for a premium payable in advance. These insurers, in turn, are backed by reinsurers and retrocessionaires.

However, if a given risk community is too small, due to the fact that there is an insufficient number of insured objects actually threatened by the same (catastrophic) risk, the state is able to build an extended risk community based on the principle of solidarity. It can do this by setting up a monopoly or making a certain type of insurance mandatory. Another way in which the state can intervene, and the one generally preferred by the private insurance industry, is by providing “back-up capacity of last resort”, to which many or even all inhabitants of a country make indirect contributions.

The insurance industry is certainly willing and able to bear its share of the responsibility. Clearly, however, it can only provide insurance protection for limited risks.

The role of the state There are at least three reasons why the state has an interest in maintaining the insurability of international terrorist attacks in the future: 1. If political risks, in particular terrorist attacks, cause huge amounts of damage and claim large numbers of victims, there would be talk of a crumbling political order and the breakdown of authority. After all, any democratic state has the self-imposed constitutional responsibility of ensuring public safety and order.

If it is unable to fulfil this duty in its entirety, it must at least contribute to the ensuing costs.

2. Coverage bottlenecks can be eased by the state as a member of the risk community. This increases overall capacity available, which in turn facilitates key economic activities, such as granting mortgages.

3. Estimates of the anticipated future mega-losses from man-made catastrophes must, realistically, be higher than the WTC losses. Terrorist attacks escalate in magnitude, ie they must be intensified continuously to increase the targeted impact of spreading fear and terror among the public. The bigger the newly defined risk community, the more effectively the economic consequences of the next mega attack will be cushioned.

23

Consequently, the state should be more than merely a supervisor and regulator.

It should also take on the role of an insurer or reinsurer by assuming certain functions, for example by J J J J

assigning the task of granting insurance or reinsurance protection to a state body; setting up a public institution with an independent legal status; acquiring a majority holding or a controlling minority holding in a private company, or by setting up a co-operative; entering into joint ventures or other types of agreement with private insurers.

It would be beyond the limits of this brochure to go into detail about state or statebacked solutions that already existed before 11 September 2001, such as Pool Re in the UK, Consorcio in Spain, SASRIA in South Africa, or the government fund in Israel. Similarly, there is insufficient room here to discuss the new solutions that have emerged since the WTC event, eg Gareat in France, Extremus AG in Germany, pool solutions in Austria and India, or the measures that were being introduced in Australia, Canada, the Netherlands and Switzerland at the time of going to press. These solutions address the issue from various entirely different angles: as direct insurers or reinsurers; with or without mandatory inclusion; from ground up or with a loss retention; with or without the insurers’ obligation to repay; and in some cases as reinsurers of last resort. Short summaries describing the mode of operation and scope of cover of some European solutions prior to and after 11 September are provided in Appendix 1 (page 28).

Precisely the situation in the US gave rise to concern for some time. Although the individual states acted as regulators in property insurance, differences of opinion between Congress and the Senate prevented any solution from being reached at the federal level. This delay had an adverse effect on the economy of the most exposed country in the world, since many business activities were abandoned due to the lack of credit facilities and a paralysing sense of uncertainty.

On 26 November 2002, the President of the United States signed the eagerly awaited “Terrorism Risk Insurance Act 2002”. The key features of this act are outlined in Appendix 2 (page 31).

The new reinsurability As we have seen so far, Swiss Re basically agrees that property and business interruption losses resulting from terrorism are insurable, even in the aftermath of 11 September 2001, provided that the following three criteria are met: 1. The additional premium for inclusion must be commensurate with the anticipated claims burden; 2. The liability for losses caused by “terrorism” must be limited in normal property and business interruption policies; reinsurance cover for these types of policies must also be limited; 3. The risk community should be extended where the number of risks threatened by the same peril is too small to obtain a reasonable premium rate.

24

As early as the 1980s and early 1990s, the major international reinsurers most seriously affected by the accumulation risk at least suspected the potential danger of a huge terrorism loss. Some changes were proposed, but only a few of them were implemented at the time. On 11 September 2001, it became painfully clear that insurers and reinsurers would have to act decisively.

In the meantime, some measures initially considered by the reinsurance market have been retracted or postponed, but the majority has been accepted. The most important methods and measures include: J J J J J J

J

Reinsurance capacity offered in the individual markets is being co-ordinated with existing private and state-run vehicles.

Reinsurance capacity in treaty business is being limited for major risks, for example, by means of an exclusion for large insurable values.

More detailed information is being requested to facilitate exposure monitoring.

Event and/or annual aggregate limits are being introduced.

Preference is being given to non-proportional solutions (mainly event covers).

The capacity for major risks is also being limited in facultative reinsurance.

Underwriters are imposing strict requirements regarding organisational, technical and personal safeguards on risk considered to have especially high exposure.

The exclusion for nuclear risks is being extended to nuclear explosions of any type and radioactive contamination where this was not previously the case.

A particularly effective, yet simple measure is a new type of ceding practice that takes terrorism liability into account in proportional reinsurance treaties, the aim being to prevent a terrorism loss from significantly surpassing the intended – and provided – capacity. This can be achieved in two different ways: J J

either by limiting terrorism liability to traditional loss estimates, eg PML or MPL; or by gearing the capacity to the actual liability for terrorism losses.

Insurers and reinsurers are also taking measures internally to accompany the “external” measures detailed above: J J

J

Manage capacity and monitor accumulations per country and/or in accordance with scenarios per metropolitan area; Examine the original policies underlying the treaties and facultative agreements, in particular with regard to the treatment of “biological and chemical attacks” in all-risk policies (in named perils cover under traditional fire insurance policies, these should, of course, not be insured). Other areas to which increasing attention should be paid are interdependency and customers/suppliers covers as well as extra expenses of complying with public authority directives/requirements under business interruption insurance. Careful consideration should also be afforded to the ways in which so-called cyber risks are dealt with in manuscript policies; Intensify research and training.

25

A question of definition In conclusion, let us take a brief look at the issue of definitions. Immediately following 11 September, a strong need emerged for a decisive definition of terrorism for insurance and reinsurance contracts. As a result, the markets were flooded with many uncoordinated but well-intended definitions, some of which unfortunately did not hit the mark.

Given the insecurity that the attack on 11 September caused among the public, politicians, the business world and the insurance industry, the call for a “hard-andfast” definition of terrorism is understandable. Under certain circumstances, coordination by way of a clear-cut market definition is essential for private insurers in various markets, for example, in countries where government regulations and covers provide for extensions beyond those offered by private property insurers.

Nevertheless, we should not expect too much from the new wave of definitions; on the contrary, we must be wary of over-complicated descriptions as these often go much further than the author of the clause originally intended. We can only hope that in any specific case, the intention behind the definition will remain at the fore. We should not forget the old, yet still valid, principle: “In dubio contra stipulatorem”.

Lest we forget …

“Attack on America” – this is how many termed the terrorist attack on the World Trade Center in New York, the Pentagon and United Airlines Flight 93, whose ultimate target will never be known for certain. But we must not deceive ourselves: in future, man-made mega catastrophes could occur anywhere in the world.

The hydra of terror has many heads, as we have already been reminded by further devastating attacks (Djerba, Bali, Mombasa and others).

The idea for this publication arose in connection with the first anniversary of 11 September 2001. We hope that our readers will view it as a useful contribution towards the ongoing discussion of terrorism insurance and trust that it will further sharpen our awareness for this issue – lest we forget.

26

Kuta (Indonesia), 14 October 2002

27

Appendix 1: Specific terrorism insurance schemes for European countries (as at 1 April 2003) 1. Solutions implemented prior to 11 September 2001 Country

Provider

Details

Northern Ireland

Government

Terrorism cover for local risk is excluded. The Criminal Damage Compensation Scheme established in 1978 provides compensation on indemnity basis for property damage caused by terrorism or unlawful assemblies of three or more persons; and for malicious or wanton damage to agricultural property.

Spain

Consorcio

The Consorcio de Compensación de Seguros (CCS) is a state insurance facility which guarantees cover for “extraordinary risks” such as earthquake, volcanic eruption, flood, storm, terrorism and civil commotion. The cover is integrated into policies issued by private insurance companies who collect premium on behalf of the CCS. Following deregulation in 1990, it became possible to insure these risks privately, whereupon the CCS became a provider of subsidiary coverage only, paying out indemnities when the private insurance company does not cover the risks in question, or when it does cover them but is insolvent. Cover granted by the CCS follows the minimum level of protection defined by law.

Policyholders must pay CCS premium in any case, thus maintaining the principle of solidarity for catastrophic risks.

With effect from 1 January 2002 business interruption due to terrorism is included.

United Kingdom

Pool Re

The international reinsurance market withdrew capacity as a consequence of IRA terrorism in the 1990s, which in turn led to a state supported solution: Limited cover with additional excess cover is available. Pool Re reinsures its members (insurance companies) at rates prescribed in the Pool Re tariff. Membership is not compulsory but pool protection is available to members only (currently around 200 insurers).

Geographical scope: UK excluding Northern Ireland, Isle of Man and The Channel Islands.

Coverage is based on a Pool Re specific definition of terrorism.

The English government acts as Pool Re’s “reinsurer of last resort”, in case of insolvency.

In the course of 2002 the Pool Re scheme which provides reinsurance for commercial property (terrorism risk) saw some changes. The key changes were: J J J

J J

Extension of the cover for acts of terrorism which cause commercial property damage and consequent business interruption from a “fire and explosion only” to an “all risks basis”.

From 1 January 2003 nuclear contamination as a result of a terrorist attack is covered.

The retention for each insurer changed from previously GBP 100 000 per head of cover per policy to a proportion of an industry wide figure. From 1 January 2003, the maximum industry retention is set at GBP 30 m per event/GBP 60 m per annum, with individual insurer’s retentions being based on their market share. Over the next four years the industry retention will increase steadily to GBP 100 m per event/GBP 200 m per annum in 2006. The new basis for retention works for the benefit of the insurers which have their losses capped, both per event and per annum. Thus, the insurers know in advance the maximum amount they could be called on to pay in any one year.

Changes in the financing of Pool Re, eg premiums for underlying policies, are no longer determined by Pool Re but by the insurers themselves according to normal commercial agreements.

New: an exclusion for computer hacking and virus damage to electronic components

The existing war risks exclusion remains unchanged.

Further information is available from HM Treasury at www.hm-treasury.gov.uk

28

2. Solutions implemented after 11 September 2001 Country

Provider

Details

Austria

Terrorism pool

From 1 January 2003, the Austrian terrorism pool gives automatic protection for commercial risks up to EUR 5 m. Risks between EUR 5 and 25 m can be ceded to the pool with payment of additional premium, while risks exceeding EUR 25 m must be covered on a facultative basis.

Biological and chemical contamination is excluded.

The pool retention is EUR 50 m in the annual aggregate, apportioned between Austrian insurers according to market share. Reinsurance (EUR 150 m in the annual aggregate excess of EUR 50 m retention) is placed in the international reinsurance market. Whether the Austrian government will ultimately assume the risk in excess of EUR 200 m is still an open issue.

France

GAREAT

With effect from 1 January 2002, France set up a state-controlled pool for terrorism cover called GAREAT (Gestion de l’Assurance et de la Réassurance des Risques Attentats et Actes de Terrorisme). This pool insures and co-reinsures risks whose insured value exceeds EUR 6 m, covering material damage and loss of profits from Fire and Engineering insurance. Transit risks are not ceded to the pool.

The pool operates on an annual aggregate loss basis and was renewed for 2003 with a modified structure: The primary of EUR 400 m is retained by the direct insurance industry. The 2 nd and 3rd layers, EUR 1.1 bn in excess of EUR 400 m and EUR 250 m excess EUR 1.5 bn, respectively, are placed with the international reinsurance market. The 4th layer is an unlimited guarantee over EUR 1.75 bn granted by the French state through CCR*. * CCR (Caisse Centrale de Réassurance) is the institution which reinsures the French insurance companies against “natural catastrophes” according to French law.

Germany

Extremus

Following an agreement between the German insurance industry and the Federal government a special insurer (Extremus Versicherungs-AG) was established to cover buildings and contents as well as business interruption losses arising from acts of terrorism in Germany. Licence was granted by the Federal Financial Supervisory Authority (BaFin) on 22 October and business was taken up by 1 November 2002.

Insured objects: industrial and commercial risks located in Germany with an insured amount exceeding EUR 25 m per insured/policy. Risks below that threshold shall be borne by the private insurance industry.

The insureds can apply for an annual aggregate limit that is commensurate to their potential terrorism risk. The maximum annual aggregate limit for any one insured (company/group) is EUR 1.5 bn.

Cover: property damage and business interruption Perils: fire, explosion, malicious damage, falling aircraft, aircraft or vehicle impact caused by terrorism Main exclusions: war and civil war, civil commotion, nuclear energy risks, nuclear radiation and radioactive substances, biological and chemical contamination, contingent business interruption.

Extremus purchases reinsurance capacity of EUR 3 bn per insured event and in the annual aggregate, in two layers. The 1st layer covers losses up to EUR 1.5 bn and is placed exclusively with direct insurers and reinsurers operating in the German market.

The 2nd layer (EUR 1.5 bn excess EUR 1.5 bn) is placed in the international reinsurance market.

Over and above the EUR 3 bn, the Federal government provides a EUR 10 bn guarantee, per insured event and in the annual aggregate, against a share of the premium. This guarantee is due to expire at the end of 2005, unless otherwise agreed.

For details, please refer to the webpage of Extremus Versicherungs-AG. (www.extremus-online.de)

29

3. Solutions under discussion Some countries in Europe are discussing plans to set up specific terrorism insurance schemes, for example Switzerland and the Netherlands.

Sources France: Gestion de l’Assurance et de la Réassurance des Risques Attentats et Actes de Terrorisme (GAREAT) Germany: Extremus Versicherungs-AG Northern Ireland: Northern Ireland Information Service Spain: Consorcio de Compensación de Seguros UK: Association of British Insurers (ABI); HM Treasury/Pool Re Swiss Re internal sources

30

Appendix 2: TRIA 2002 – Key features From the date of enactment until the expected conclusion of the programme on 31 December 20053, the US government will participate in damage caused by acts of terrorism as certified by the state. In turn, insurers must make available terrorism coverage for commercial and industrial risks.

For an act of terrorism to be certified as such, it must constitute J J J J

a violent act or an act that is dangerous to human life, property or infrastructure committed within the US, on a US air carrier or vessel, against US aircraft abroad or on the premises of a US mission (eg embassy or consulate) by perpetrating individuals or groups acting on behalf of any foreign person or foreign interest in an effort to coerce the US government or civilian population.

A further condition for the programme to take effect is that the overall insured loss across all lines of business in the programme must exceed USD 5 million.

If the Secretary of Treasury, in agreement with the Secretary of State and the Attorney General, denies certification, this decision is definitive and non-appealable.

The programme concerns property and casualty lines of insurance4 for commercial and industrial risks excluding personal lines. It includes business interruption insurance, but not reinsurance.

The Federal government’s share in an insured loss occurrence amounts to 90 % of the insured loss amount that exceeds the insurers’ retention. The retention increases each year, and has been set at J J J

2003 > 7 % 2004 > 10 % 2005 > 15 %

of the insurers’ premium income in the relevant property/casualty lines of business in the previous year.

For example, if a terrorist attack causes insured losses of USD 40 bn in 2003, private insurers will probably carry approximately USD 12 bn as part of their deductible, provided that the losses affect all insurers to the extent of their premium market share. In addition, they will bear 10 % (USD 2.8 bn) of the amount in excess of the deductible. In other words, the insurers bear USD 14.8 bn and the state USD 25.2 bn of the losses.

The liability of the government and the insurers combined is capped at USD 100 bn in each programme year.

The programme concerns virtually all insurers which operate in the US and collect premiums in the lines affected. This also includes reinsurers, insofar as they write direct insurance business, to the extent of this business.

The state is required to reclaim any difference between its payments (in excess of the sum of the insurers’ retention plus the insurers’ 10 percent quota share retention) and J J J

USD 10 bn in the first programme year; USD 12.5 bn in the second programme year; USD 15 bn in the third programme year,

by means of a policyholder surcharge. This surcharge is collected by commercial property/ casualty insurers participating in the programme and remitted to the Treasury.

3 The Secretary of Treasury has to decide before 1 September 2004 whether the programme should be extended to include 2005. Otherwise, the programme will expire at the end of 2004.

4 Under the act, this comprises: “Fire; Allied Lines; Farmowners Multiple Peril; Commercial Multiple Peril (non-liability portion); Commercial Multiple Peril (liability portion); Ocean Marine; Inland Marine; Workers’ Compensation; Other Liability; Products Liability; Commercial Auto No-Fault (personal injury protection); Other Commercial Auto Liability; Commercial Auto Physical Damage; Aircraft (all perils); Surety; Burglary and Theft; Boiler and Machinery”

31

Comments Although an act regulating the liability of the state was advocated by the US insurance industry and global reinsurers, the specific details of the Terrorism Insurance Act 2002 is not entirely convincing, since it leaves too many issues unresolved. For example, insurers and reinsurers now have to decide whether, to what extent, and at what prices and conditions they should provide cover against uncertified or uncertifiable acts of terrorism. It can be assumed, after all, that numerous dangerous, purely American groups and individuals (eg the Oklahoma Bomber in 1995) also have considerable terrorist potential. Conversely, certain radical groups appear to be integrated in an international network while retaining their ability to decide locally and act without verifiable instructions from abroad. And finally, what happens in the case of terrorist attacks for which no one claims responsibility?

To some extent, the act is “semi-mandatory” since in a first step it declares invalid all terrorism exclusions for insurance policies falling under the act. Despite the government’s liability, direct insurers will therefore still be faced with substantial obligations. Even if some of these liabilities become void as policyholders decline the cover or fail to pay the premiums, the deductible rule “guarantees” extremely high obligations taking effect by 2004 at the latest. The large insurers, and in particular the reinsurers, will thus be forced to take a prudent approach in managing the available capacity.

A further major uncertainty relates to pricing. On the one hand, the act requires participating insurers to provide insurance cover which does not differ materially from the liability amount and cover conditions for losses from non-terrorist events; on the other hand, it grants so-called state insurance regulators the right to intervene in pricing and even declare premiums as invalid if they are deemed excessive, inadequate or unfairly discriminatory.

Finally, the fact that financial assistance under the Act is based on aggregated terrorism claims for all lines of business in a calendar year makes it difficult for insurers to buy reinsurance for the terrorism exposures remaining in their retention under TRIA. Most reinsurance contracts cover one line of business only. Furthermore, limitations per risk or per event are common in reinsurance treaties.

Improved insurance cover involving state guarantees for losses caused by acts of terrorism was long overdue in the US. However, the specific form of the Terrorism Insurance Act 2002, in our opinion, gives certain grounds for scepticism.

32

Illustrations Lockerbie, 21 December 1988 “The Maid of the Sea�: The wrecked cockpit of Pan Am Jumbo B-747, Flight 103, lies in a field near the Scottish town of Lockerbie.

Oklahoma City, 19 April 1995 Rescue workers stand in front of the Alfred Murrah Federal Building following an explosion in downtown Oklahoma. The bombing killed 169 people, including 19 children.

Manchester, 15 June 1996 The scene of devastation in Manchester city centre following a bomb blast. The explosion, suspected by police to be the responsibility of the IRA, injured more than 200, although none fatally.

Washington, 11 September 2001 Photographers document the clearing of rubble in the damaged section of the Pentagon in Washington DC, USA, after 11 September.

New York, 11 September 2001 Collapse of the World Trade Center following an unprecedented terrorist attack. Worst man-made loss in history. The official number of casualties from this attack is 2 795.

Kuta (Indonesia), 14 October 2002 An armed Indonesian policeman surveys the scene of a bomb blast near the crater formed by a car bomb in Kuta, Bali, which killed at least 183 people on the holiday island.

33

34

Other publications in the “Risk perception” series: Preparedness – Basics of business continuity management Despite all the precautions they take, companies may suddenly find themselves in situations that threaten their survival. Management is expected to deal with loss events and the attendant aftermath in a satisfactory manner.

In addition to the traditional tasks of risk management, companies thus need to prepare themselves systematically to deal with loss events by establishing a sound emergency and crisis management organisation.

Order no.: 203_01295_en Opportunities and risks of climate change Today, global warming is a fact. The climate has changed: visibly, tangibly, measurably.

An additional increase in average global temperatures is not only possible, but also very probable, while human intervention in the natural climatic system plays an important, if not decisive role. This publication shows how the forecasts of climate research can be broken down into practical measures, and thus aims to make the concrete effects of climate changes visible.

Order no.: 1491585_02_en/de Safety culture – A reflection of risk awareness The safety of complex production processes is not dependent of technology alone. Rather, it is a balancing act between automation, the reliability of management systems and the competence of plant operators. The risk awareness of the employees reflects a company’s safety culture.

Order no.: 203_98139_en Space weather – Hazard to the Earth?

Space weather affects not only the functioning of technical systems, but may also endanger human health and life. An increase in solar activity may thus bear an impact on many areas of our increasingly complex technological world.

Order no.: 203_00223_en Storm over Europe – An underestimated risk How do winter storms occur in Europe? What potential losses are involved? And how should the insurance sector deal with this risk? Natural catastrophe experts at Swiss Re have been tackling such questions for years, and with good reason, as “Lothar” and “Martin” demonstrated once again in December 1999.

This publication not only addresses the phenomenon of European storms, but also presents a method for modelling storm risk and establishing appropriate premiums.

Order no.: 201_00239_en/de/fr

Twister! The professional reinsurer’s perspective Tornadoes are one of the most frightening of natural events because of their obvious destructive nature. This publication illustrates how a better understanding of the dimensions of the storms and the technologies for tracking them can contribute to mitigating damage and saving lives. The appendix includes tips for personal and property protection in the event of tornado watches or warnings.

Order no.: 201_00229_en

The brochure entitled Swiss Re Publications includes a complete overview of all available Swiss Re publications.

Order no.: 1492220_02_en

Floods – an insurable risk?

Although flood disasters are increasing in terms of both size and frequency, cover against this risk is not available in many places. Should an explanation for this be sought in the insurance business itself? The publication deals with this question in detail, describes and illustrates the flood risk and shows how people cope with it.

Order no.: 201_ 98142_en/de/fr/es Floods – an insurable risk?

A market survey This companion publication, “Floods – an insurable risk? A market survey”, profiles the insurance solutions used in 24 selected markets. The study examines the aspect of insurance, discusses the principles of insurability and presents possible risk assessment approaches.

Order no.: 201_98145_en/de/fr Tropical cyclones Each year, some 80 tropical cyclones form above the seas in the tropics. It is impossible to predict when this will happen or what path the storm will take. This publication details Swiss Re’s concept for assessing tropical cyclone risks, using natural hazard models developed by governmental research institutes, commercial consultants, brokers as well as insurance and reinsurance companies.

Order no.: 201_9678_en/de/fr/es Electrosmog – A phantom risk Electromagnetic fields are one example for socalled phantom risks, ie a prospective hazard, the magnitude of which cannot be gauged and which perhaps does not even exist, but which is nonetheless real – if only in that it causes anxiety and provokes legal actions.

These risks are a hazard for the insurance industry – not due to the incalculably small health risks, but to the incalculably great risk of socio-political change.

Order no.: 203_9677_en

How to order To order a copy of a publication, please send an email to publications@swissre.com. You can also place your order via our portal at www.swissre.com. Please include the title of the publication, the order number and the language abbreviation. The language versions are indicated at the end of the order number as follows: English _en _de German French _fr Italian _it Portuguese _pt Spanish _es Swiss Re’s P&C publications are edited and produced by Technical Communications, Chief Underwriting Office.

35

Christian Brauner Risk Manager

Georges Galey Chief Underwriting Office

Christian Brauner has worked for Swiss Re as a risk manager since 1986. On several occasions, he has been involved in the operational management of international relief efforts following natural disasters.

He is deputy municipal fire chief of the Freiburg im Breisgau fire service and lectures at the Police University of Baden-Württemberg.

Georges Galey studied at the Business and Consular Schools of Bern, Switzerland, before working for the Swiss Foreign Office in London, Baghdad and Santiago de Chile. He joined Swiss Re in Zurich as a training consultant in 1974 and changed to the company’s Property department as an underwriter in 1979, where he became head of the “London brokers” facultative unit.

In 1993, Georges Galey started a career as a professional musician but rejoined the Property/Engineering unit of Swiss Re’s Chief Underwriting Office in 1999. He has authored and co-authored numerous Swiss Re publications, the most recent ones being “Facultative non-proportional reinsurance and obligatory treaties” and “Contigent business interruption and other special covers”.

© 2003 Swiss Reinsurance Company Title: Terrorism risks in property insurance and their insurability after 11 September 2001 Authors: Christian Brauner and Georges Galey with contributions from Birgit Wachenfeld-Teschner and other P&C representatives.

Editing/production: Technical Communications Chief Underwriting Office Translation: Group Language Services Graphic design: Galizinski Gestaltung, Zurich Photographs: Cover: Chip Forelli, The Image Bank/Getty Images Pages 6, 12, 16, 20: Keystone Page 24: Lisa Quinones, Black Star/Dukas Page 31: Jonathan Drake, Reuters The material and conclusions contained in this publication are for information purposes only, and the author(s) offers no guarantee for the accuracy and completeness of its contents. All liability for the integrity, confidentiality or timeliness of this publication, or for any damages resulting from the use of information herein is expressly excluded.

Under no circumstances shall Swiss Re Group or its entities be liable for any financial or consequential loss relating to this product.

This publication is also available in German.

Order number: 1498373_en Property & Casualty, 05/04, 3000 en

Swiss Reinsurance Company Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland Telephone +41 43 285 2121 Fax +41 43 285 5493 publications@swissre.com Swiss Re publications can also be downloaded from www.swissre.com