Terrorism Insurance: What brokers need to know and why?

This year has seen a massive surge in terrorist attacks, with a reported 1000 incidents in the first seven months of 2016.  Excluding 9/11, the average cost of terrorism between 2000 and 2012 was US$12 billion with the latest statistics up to 2014 placing global terror related costs at US$52.9bn.

Australia’s geographic distance from the rest of the world has always provided a sense of comfort but Martin Place reminded us that we are not immune to terrorism. We have experienced three onshore attacks and six disrupted plots in the last four years which has certainly made businesses concerned about terror related risk.

Stella Pruscino, Senior Placement Broker at Willis Tower Watson and terrorism insurance expert says: “Other than Martin Place there has been no economic cost to clients or insurers in Australia but there is certainly the need for greater understanding and awareness across the broad spectrum of the industry and in turn the insurance customer. Clients are seeking to gain a deeper level of knowledge on how their business can be affected by an event, regardless of whether it’s a Declared Terrorist Incident or not. The rise of global incidents and their need for greater understanding of where they are positioned from an exposure perspective is the driving force.”

“As brokers our duty of responsibility to our clients is to understand new and emerging risks such as terrorism and how incidents can impact their business.  Clients are starting to question if they’re covered and what they are covered for and what the Terrorism Exclusion means in their wording.”

Businesses directly targeted by the events are not the only ones impacted, the ensuing economic loss can be devastating to all business owners in the city or country. The attack itself may cause property and casualty loss, but the less apparent and longer economic consequence is the loss of valuable customer base. Understanding the impact of these losses overseas will enable an Australian broker to start discussions with their clients about how they would navigate through the same type of incident.

Pruscino explains: “For clients who have operations or customers and/or suppliers in overseas locations it is important to understand if there is a local Reinsurance Pool in those Countries and how their pool would respond to an event in that Country. For those Countries that do not have a Pool, what standalone terrorism insurance options are available and how would that tie into the Australian based policies.”

“Brokers need to acquaint themselves with [the Terrorism Insurance Act 2003] either through their own research into [it] or through a professional course, the greater the knowledge, the better versed brokers will be to have a discussion with their clients. Brokers should also work with their clients to review their existing Risk Management Plans to take into account physical security and people risk at their locations.”

Basis risk controls include:

  • security plans
  • critical incident plans
  • trauma response plans
  • evacuation procedures
  • lockdown procedures.

In order to understand insurance gaps, brokers must obtain a clearer understanding of how the Terrorism Insurance Act 2003 will relate to their client’s business and what will be the outcome for them in the case of a Declared Terrorist Incident, that is:

  • Is there a policy in place that would respond?
  • Does the client have claim for loss?
  • Is it an eligible contract?
  • Does the contract contain a terrorism exclusion?
  • Does the ownership rule apply?
  • Is it an exclusion under the Act?

The common misconception is that everything is covered from a property, business interruption and liability perspective. The Australian Reinsurance Pool Corporation (ARPC) provides some of the broadest coverage compared to other Pools but it is by no means a complete catch up for exposures.

“An example close to home is that of Lindt Café siege in Sydney in 2014 which brought to light the number of businesses that were affected by prevention of access when a large section of the city was cordoned off with less than half of the affected businesses having prevention of access cover,” Pruscino says.

Once brokers understand the particular exposure that their client has (and this will vary from client to client and industry to industry) they will be in a stronger position to have discussions with Insurers as to what type of products are available as an offering to their client be they traditional policies that can be extended or bespoke offerings such as:

  • political risk/violence
  • kidnap and ransom
  • standalone terrorism – property or liability
  • impairment of access
  • active shooter
  • active assailant
  • loss of attraction
  • cyber.

Hear more from Stella Pruscino and Mike Pennell, Chief Underwriting Officer, ARPC at the 2016 NIBA Convention, 11-13 September in Melbourne. Register now for the convention here.