Insuring Against Terrorists Armed With Weapons of Mass Destruction
By Jack Seaquist, assistant vice president at AIR Worldwide Corp.
Most catastrophic terrorist events have been caused by vehicle-borne explosive devices, devices often activated by a suicide bomber. Attacks of this nature kill up to hundreds of people and can severely damage or destroy buildings in the immediate vicinity. Among the well-documented examples of such events are the bombing of the U.S. Marine barracks in Beirut and the Oklahoma City truck bombing.
While insured losses for such attacks have been modeled up to levels exceeding $10 billion, much higher losses could result from terrorists' use of chemical, biological, radiological or nuclear--CBRN--weapons. AIR Worldwide has modeled such scenarios, and they yielded insured losses of up to $768 billion. The risk from CBRN, even if it has a low probability, warrants continued vigilance by counterterrorism organizations and prudent risk management by insurers.
This conclusion is reinforced by the judgment of the intelligence community:
"We assess that al-Qaida will continue to try to acquire and employ chemical, biological, radiological or nuclear material in attacks and would not hesitate to use them if it develops what it deems is sufficient capability," reported the National Intelligence Estimate from the Office of the Director of National Intelligence on July 2007.
CBRN weapons are principally designed to cause injury and death to large numbers of people. Most individuals will be affected by direct exposure to the weapon agent, by breathing the agent or by skin contact with it. Such exposure can result in either immediate or delayed impact.
Exposed individuals are likely to be insured under one or more policies, including workers' compensation if they are working at the time. This outcome is a high likelihood for attacks in cities and is likely to affect large numbers of individuals from single policies.
From a property perspective, losses come chiefly from residual contamination. The weapon agent could linger invisibly in a persistent state of danger for a very long period. Rehabilitation of property can involve extensive remediation activities, including cleaning, fumigating, removing surface materials, or dismantling and destroying the building. The costs of such activities could exceed the replacement cost.
From a property insurer perspective, total losses are driven by the extent of the area needing cleanup. The larger the event, the more area likely to be contaminated--and the higher the resulting losses. In one of the largest CBRN events AIR Worldwide modeled, significant contamination spread as far as approximately two miles from the point of origin in Midtown Manhattan. The modeled industry insured commercial property loss was $158 billion.
There is considerable uncertainty, however, as to what insured losses might be in an actual event. CBRN coverage and take-up are two rapidly changing characteristics of the commercial property insurance market today. Many policies exclude coverage for many types of CBRN weapons--through the nuclear hazard and pollution exclusions. However, some insurers now do offer such coverages.
Given such coverage, we must consider the uncertain extent of possible contamination. Contamination is quantified by measuring the amount of residual contamination in a standard unit of volume. The highest concentrations can be expected to be in the immediate area of an attack, while declining concentrations would be borne over time by a plume to surrounding areas until the contaminant eventually falls to the ground.
There will be a lower but measurable contamination at long distances. Also, the area of the surface contaminated can increase with the square of the distance from the initiating event. Consequently, the cutoff distance that defines the limit of a contaminated area is critical to being able to determine the number of properties exposed to loss.
AIR has studied the impact of CBRN contamination and has found that the definitions of standards for acceptable residual contamination remain uncertain. For example, the U.S. Environmental Protection Agency and the Nuclear Regulatory Commission each have multiple standards for residual radiation contamination scenarios. These standards were defined differently for Superfund sites, nuclear power plant accidents and for nuclear facility license termination cases. Depending on which standard is applied, an area defined as needing cleanup can vary by as much as a factor of eight.
The Department of Homeland Security is applying these standards with respect to terrorist incidents that involve improvised nuclear devices and radiological dispersion devices (e.g., dirty bombs). However, in the draft version of the DHS guidelines, it is stated that a numeric cleanup level for late phase cleanup is "not useful."
Instead, cleanup standards are to be determined after an event occurs using an optimization process that will take into account the preconditions of a site (i.e., conditions prior to the terrorist event) and how the now-contaminated area was used previously.
The process calls for a consensus to be achieved by local leaders, technical experts, government agencies, and public interest groups as to what cleanup standards will apply.
While this may be a practical process from a public policy perspective, it produces uncertainty for insurers because the extent of the insurer's loss will depend on decisions made by an assortment of stakeholders only after events occur.
The government's Terrorism Risk Insurance Program was extended in late 2007 to continue until 2014, thereby providing stability to the terrorism insurance market. During the congressional debate of the extension, the treatment of coverage for CBRN differed between the House and Senate versions.
As finally enacted, there was no mandatory offering of such coverage; however, a related study was to be undertaken by the Government Accountability Office.This ongoing study is examining the availability and affordability of insurance coverage for losses caused by terrorist attacks involving CBRN materials, the outlook for such coverage in the future, and the capacity of private insurers and State workers' compensation funds to manage risk associated with CBRN terrorist events. The study is to be completed in December of this year, and any recommendations the GAO may have will be made at that time.
As policy coverage for CBRN expands in this market or is affected by future changes to the TRIP, it is important to have both a sound estimate of the potential losses to a portfolio and to understand the impact of uncertainties engendered by decisions made after an attack occurs.
Terrorism models allow users to quantify losses on a deterministic (predefined scenarios) and probabilistic basis (using expert opinion on possible event likelihoods) in a comprehensive manner, thus leading to control of maximum exposure levels.
September 15, 2008
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