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TERRORISM RISK IN INSURANCE SECTOR

INTRODUCTION ON TERRORISM
Terrorism is the systematic use of terror
especially as a means of coercion. There is no
internationally agreed definition of terrorism. Most
common definitions of terrorism include only those acts
which are intended to create fear (terror), are perpetrated for an ideological goal (as
opposed to a lone attack), and deliberately target or disregard the safety of noncombatants.
Some definitions also include acts of unlawful violence and war. The history
of terrorist organizations suggests that they do not select terrorism for its political
effectiveness. Individual terrorists tend to be motivated more by a desire for social
solidarity with other members of their organization than by political platforms or
strategic objectives, which are often murky and undefined. The word "terrorism" is
politically and emotionally charged, and this greatly compounds the difficulty of
providing a precise definition. One 1988 study by the US army found that over 100
definitions of the word "terrorism" have been used. A person who practices
terrorism is a terrorist. The concept of terrorism is itself controversial because it is
often used by states to delegitimize political opponents, and thus legitimize the
state's own use of terror against those opponents.
While acts of terrorism are criminal acts as per the United Nations Security
Council Resolution 1373 and domestic jurisprudence of almost all countries in the
world, terrorism refers to a phenomenon including the actual acts, the perpetrators
of acts of terrorism themselves and their motives. There is disagreement on
definitions of terrorism.

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DEFINITION
One of the changes made to TRIA with the enactment of the Terrorism Risk
Insurance Program Reauthorization Act of 2007 was a revision to the definition of
an act of terrorism that eliminated the requirement that an individual or individuals
that carry out an act of terrorism be acting on behalf of a foreign person or foreign
interest. In short, this means that acts formerly referred to as "domestic" terrorism
may now be certified as an act of terrorism under TRIA.
Section 102(1) defines an act of terrorism for purposes of the Act. Please
note that the unmodified reference to "the Secretary" refers to the Secretary of the
Treasury. The revised Section 102(1)(A) states, "The term "act of terrorism" means
any act that is certified by the Secretary, in concurrence with the Secretary of State,
and the Attorney General of the United States(i) to be an act of terrorism; (ii) to
be a violent act or an act that is dangerous to(I) human life: (II) property; or (III)
infrastructure; (iii) to have resulted in damage within the United States, or outside
the United States in the case of(I) an air carrier or vessel described in paragraph
(5)(B); or (II) the premises of a United States mission; and (iv) to have been
committed by an individual or individuals, as part of an effort to coerce the civilian
population of the United States or to influence the policy or affect the conduct of
the United States Government by coercion."

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HISTORY OF TERRORISM
The term terrorism was originally used to describe the actions of the
Jacobin Club during the "Reign of Terror" in the French Revolution. "Terror is
nothing other than justice, prompt, severe, inflexible," said Jacobin leader
Maximilien Robespierre. In 1795, Edmund Burke denounced the Jacobins for
letting "thousands of those hell hounds called terrorists" loose upon the people of
France.
The term "terrorism" was originally used to describe the actions of the
Jacobin Club during the "Reign of Terror" in the French Revolution. "Terror is
nothing other than justice, prompt, severe, inflexible," said Jacobin leader
Maximilien Robespierre. In 1795, Edmund Burke denounced the Jacobins for
letting "thousands of those hell hounds called terrorists" loose upon the people of
France.
In January 1858, Italian patriot Felice Orsini threw three bombs in an
attempt to assassinate French Emperor Napolean III. Eight bystanders were killed
and 142 injured. The incident played a crucial role as an inspiration for the
development of the early Russian terrorist groups. Russian Sergey Nechayev, who
founded People's Retribution in 1869, described himself as a "terrorist", an early
example of the term being employed in its modern meaning. Nechayev's story is
told in fictionalized form by Fyodor Dostoevsky in the novel The Possessed.
German anarchist writer Johann Most dispensed "advice for terrorists" in the
1880s.

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TYPES OF TERRORISM
In the spring of 1975, the Law Enforcement Assistant Administration in the
United States formed the National Advisory Committee on Criminal Justice
Standards and Goals. One of the five volumes that the committee which was
entitled Disorders and Terrorism, produced by the Task Force on Disorders and
Terrorism under the direction H.H.A. Cooper, Director of the Task Force staff. The
Task Force classified terrorism into six categories.

Civil Disorders A form of collective violence interfering with the peace,


security, and normal functioning of the community.

Political Terrorism Violent criminal behavior designed primarily to generate


fear in the community, or substantial segment of it, for political purposes.

Non-Political Terrorism Terrorism that is not aimed at political purposes but


which exhibits conscious design to create and maintain high degree of fear for
coercive purposes, but the end is individual or collective gain rather than the
achievement of a political objective.

Quasi-Terrorism The activities incidental to the commission of crimes of


violence that are similar in form and method to genuine terrorism but which
nevertheless lack its essential ingredient. It is not the main purpose of the quasiterrorists to induce terror in the immediate victim as in the case of genuine
terrorism, but the quasi-terrorist uses the modalities and techniques of the genuine
terrorist and produces similar consequences and reaction. For example, the fleeing
felon who takes hostages is a quasi-terrorist, whose methods are similar to those of
the genuine terrorist but whose purposes are quite different.
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Limited Political Terrorism Genuine political terrorism is characterized by a


revolutionary approach; limited political terrorism refers to acts of terrorism
which are committed for ideological or political motives but which are not part of a
concerted campaign to capture control of the State.

Official or State Terrorism "referring to nations whose rule is based upon


fear and oppression that reach similar to terrorism or such proportions. It may also
be referred to as Structural Terrorism defined broadly as terrorist acts carried out
by governments in pursuit of political objectives, often as part of their foreign
policy.

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CHAPTER NO: 1 TERRORISM RISK


1.1 INTRODUCTION
Terrorism risk differs from other risks, as it amorphous and unpredictable.
These risks by definition are not random and characterized by very low frequency
coupled with little historical data. The characteristic feature of terrorism risk is its
man- made nature, the possibility of high spillover on the macro economy and the
greater complexity in modeling it.
Unlike natural disasters, terrorism risk is different cup of tea. Terrorists react
to new information and adapt to our efforts to mitigate the potential damage they
might unleash. The more security we apply to potential target, the less likelihood
that terrorist will strike that target. It is a vicious circle. Nations create new
security, terrorist change their tactics, and countries, in turn pursue new avenues to
secure against future attacks.
Every attack is different, in its execution, methodology, or choice of target.
Other than the terrorists, the government of the country plausibly has some inkling
of potential terrorist threats. However, for oblivious security reasons, they
generally cannot share what they know about terrorist and their activities. This
could endanger the effectiveness from terrorism is not possible; the only possibility
is reducing its likelihood, mitigating its impact, or managing its consequences.
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The biggest problem is the lack of information. Insurers need accurate risk
information to determine appropriate pricing, reserving and investment strategies.
Without this information, creating an insurance cover is not possible. Terrorists,
rely on stealth to maximum the disruption and destruction they cause. Therefore,
unlike natural disaster, terrorist do not follow predictable patterns. They are
manmade events, subject to the ingenuity and technology of the terrorists.
Terrorism risk is not new in itself, but the 9/11 incident has brought it to the
discernment of insurers, reinsures and industry experts. Before 9/11 incident
terrorism risk was being covered free of cost as the chance of property damage
from terrorist acts were considered remote. But, the magnitude of the losses
suffered during 9/11 incident brought tremors in the insurance industry and the
society at large. Insurers had also cautioned that any another event of comparable
magnitude could do irrevocable damage to the industry. Following September 11
attack, insurance companies abstained themselves from renewing the coverage for
terrorist events particularly for large business and those perceived to be at some
risk like the aviation industry. The reinsurers excluded terrorism from coverage
which in turn compelled insurers to start excluding these risks from commercial
policies when they came up for renewal.

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1.2. NATURE
Terrorism risk is different from the kind of risks which are typically defined
by industry experts. These risks are not homogeneous and vary by factors like
geographical location, industry, company reputation, and level of defensive
preparation. These risks by definition are not random. In contrast to storms or car
accidents, these attacks are carefully planned and coordinated and the losses from
these attacks are high magnitude. Also, these risks are not well understood. With
catastrophe risks like hurricanes and earthquakes, tremendous amount of data is
available on the probability but dearth of credible data pose problems to ascertain
the price for the risk. Terrorism risk is characterized by very low frequency with a
very little historical data. The insurer needs to know about the likelihood, extend of
damage and accumulated risk resulting from insuring buildings within a given
geographical area including fire after a terrorist attack. Hence, there is a need to
quantify the risk so as to decide upon the coverage and the premium for the cover.
Companies are approaching the issue by using reliable risk assessment
models from the experiences of other countries such as Great Britain, Germany,
France and Italy. According to the modeling firm, AIR Worldwide, the way
terrorism risk is measured is not much different from assessments of natural
disaster risk except that the data used for terrorism are more subject to uncertainty.
It is easier to project the risk of damage in a particular location from an earthquake
of a given intensity or a Category 5 hurricane than a terrorist attacks and therefore
the data to incorporate into models are readily available.

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1.3. COMPONENTS
Experts have jotted down three major components in Terrorism risk, namely:
1) Threat,
2) Vulnerability, and
3) Consequence.

THREAT
A terrorist threat to a city or region has the direct impact on occurrence of an
attack on the city, and hence increases the possibility of loss due to terrorist attack.
For example, if one city were known in the course of gathered intelligence or
previous history to be the favored target for terrorist attacks, this observation
would hold a claim that this city has a large intensity of terrorism risk in future.
Terrorist groups pose a threat when they have the objective and competence to
entail harm to a country. It may be noted that mere objectives without competence
or competence without objectives acts as threat. Hence, both are compulsory for
existence of Threat from a terrorist group. For the governments to allocate
domestic security resources to safeguard significant infrastructure or cities
necessitates quantifying the threats posed to the targets or specific nature of
attacks. One needs to study the scope of threat in terms of a specific set of targets,
a specific set of attack types, and a specific time period, to apply probability which
could be used as a measure of the likelihood of a terrorist attack. Threat could be
measured in terms of the probability that a specific target is attacked in a specific
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way during a specified time period, i.e. Threat = Probability (terrorist attack
occurs).

VULNERABILITY
Vulnerabilities within a region also represent logical targets for terrorism
due to its close relation with the infrastructure of the city. Say if a city has an
atomic or nuclear power plant, it is obvious that the city could be more targeted for
the terrorist attacks. The threat of terrorism is a dynamic one as it acclimatizes to
conditions that affect the possibility of attack achievements. We use Probability to
measure the likelihood that vulnerability will show the way to damage when
terrorist attacks occur. Measure (Vulnerability) could be defined as the probability
that damages involving fatalities, injuries, property damage, or other consequences
occur, given a specific attack type, at a specific time, on a given Target. I.e.
Vulnerability = Probability (attack results in damage attack occurs).

CONSEQUENCE
Terrorists aim to create maximum loss to the target city or region in terms of
men and material. Hence the possible consequences of terrorist attacks need to be
taken into account when quantifying terrorism risk. Consequence can be defined as
the extent and type of damage resulting from successful terrorist attacks. In order
to measure the consequence, we need to quantify the expected magnitude of
damage (e.g., deaths, injuries, or property damage), given a specific attack type, at
a specific time, that results in damage to a specific target or.
Consequence = Expected (damage attack occurs and results in damage)
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Consequence can be computed by taking into account the damages, fatalities,
injuries, economic losses. This list is not exhaustive, and we can take other aspects
of consequences also. For the practical purposes, we limit our focus to mortality,
morbidity, and economic loss at the point of attack in order to demonstrate an
approach to risk estimation in a way that is transparent yet appropriate to realworld policy decision making.

TERRORISM RISK AS A FUNCTION OF THREAT, VULNERABILITY, AND


CONSEQUENCES
Terrorism risk can be defined as the anticipated consequences over some
period of time to a distinct set of targets, consequential of a definite set of threats.
Therefore we can see that threats, vulnerabilities, and consequences play a
considerable part in the overall terrorism risk to which a country is exposed.
Terrorism Risk can be measured as the expected consequence of an existing threat,
for a given target, attack mode, and damage type. Terrorism risk is the product of
threat, vulnerability and consequence (Terrorism Risk= Threat X Vulnerability X
Consequence).
Terrorism Risk= Probability (attack occurs) X Probability (attack results in
damage | attack occurs) X Expectation (damage | attack occurs and results in
damage).

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ESTIMATING THE COMPONENTS OF TERRORISM RISK


In practice threat, vulnerability, and consequences are all conditional on
significant uncertainties, and hence the task of estimating each component
becomes daunting. To aid risk estimation function, one needs to understand the
different sources of these uncertainties which affect terrorism risk. Variability and
error in estimating all the components and, ways to value different types of
consequences are two important sources of uncertainty in estimating terrorism risk.

TERRORISM MODEL COMPONENTS

Terrorism Risk Models are developed to assess impacts in terms of property loss,
economic losses, injuries and fatalities, confidence level and feelings of security of
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citizens and businesses, and innumerable additional potentially pertinent effects.
Risk can similarly be articulated in terms of any one, or a combination, of these
consequences. Here value judgment (depending upon relative importance of
different consequences) is adopted to evaluate each type of consequence in
terrorism risk. Each type of risk can be combined mathematically into a singledimensional aggregate risk.
AN

APPROACH TO TACKLING THE TERRORISM RISK QUANTIFICATION TASK HAS

BEEN OUTLINED, FROM WHICH THE FOLLOWING PRINCIPAL OBSERVATIONS MAY


BE DRAWN:

1) The frequency and severity of planned attacks will depend critically on the
network architecture of the terrorist organization.
2) Pressurized increasingly by counter-terrorist forces, terrorist organizations may
adapt to form emergent swarm clusters. These rapidly forming virtual cells,
communicating via internet, will be very hard to detect and stop.
3) Emergent networks will facilitate the execution of more frequent, but less
ambitious and generally less damaging, planned attacks.
4) An event-tree may be constructed to estimate the probability that a planned attack
will succeed, depending on the availability and usage of intelligence; the
effectiveness of security barriers; and technical and logistical mishaps.
5) The loss severity distribution may be derived by mapping losses from realistic
showpiece terrorism insurance scenarios, and assigning a cost function to each.
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The cost function reflects practical logistical factors such as planning time,
technical difficulty, and consumption of scarce resources .
6) The overall computation of a terrorism loss exceedance curve can be achieved,
provided that the assignment of subjective input probabilities is made using the
formal elicitation of expert judgment, such as has been invoked already by
government security agencies.

RISK OF DYING
Smoking 10 cigarettes a day
All natural causes age 40
Road accident
Playing soccer
Homicide
Terrorism attack in 2001
Hit by lightning
Terrorism attack in 1990s

One in 200
One in 850
One in 8,000
One in 25,000
One in 100,000
One in 100,000
One in 10,000,000
One in 50,000,000

CHAPTER NO: 2 TERRORISM INSURANCE


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2.1. INTRODUCTION
Before understanding the meaning of
any risk let us first learn what Insurance is.
Insurance is an act or an instance of insuring.
The consideration for this is called as premium. Now lets move on to terrorism risk
insurance. The 9/11 terrorist attacks, have defined a new risk i.e. Terrorism Risk.
Terrorism is not a current phenomenon, and is apparently a multifaceted
phenomenon falling between the nexus of war and peace. Terrorist attacks have
earlier taken place, in US and at various parts of the world like the Oklahoma city
bombings in the year 1995, and terrorist attacks on World Trade Center in the year
1993, but it was only after 9/11 WTC attacks, terrorism was given status of a
potential risk capable of large scale destruction. For this underestimation of
terrorism risk, many insurance companies had to pay huge price, and quite many
went bankrupt.
The concept of Insurance which started with covering Marine risks has been
adapted to different risks. Terrorism is a new risk posing challenge for the
insurance industry. The terrorist attacks which took place over the past two decades
have significantly altered the economic and security settings world over. In this
direction the insurance industry and Governments around the world are enduring to
create and refine the risk management facilities and systems which would enable
national and global business interests to persist with confidence regardless of the
capricious and catastrophic nature of terrorism risks. In this paper, an attempt is
made to study risk management issues of Terrorism Risk.
The insurance industry and Governments around the world are enduring to
create and refine the risk management facilities and systems which would enable
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national and global business interests to persist with confidence regardless of the
capricious and catastrophic nature of terrorism risks. This paper attempts to study
the funding issues related to the occurrence terrorist attacks i.e. how a terrorist
event is funded by the terrorist groups and how government, individuals, and
insurance companies share the losses of such terrorist event.

2.2. EXISTENCE
Terrorism insurance is insurance purchased by property owners to cover their
potential losses and liabilities that might occur due to terrorist activities. It is
considered to be a difficult product for insurance companies, as the odds of
terrorist attacks are very difficult to predict and the potential liability enormous.
For example the September 11, 2001 attacks resulted in an estimated $31.7 billion
loss. This combination of uncertainty and potentially huge losses makes the setting
of premiums a difficult matter. Most insurance companies therefore exclude
terrorism from coverage in Casualty and Property insurance, or else require
endorsements to provide coverage.
On December 26, 2007, the President of the United States signed into law
the Terrorism Risk Insurance Program Reauthorization Act of 2007 which extends
the Terrorism Risk Insurance Act (TRIA) through December 31, 2014. The law
extends the temporary federal Program that provides for a transparent system of
shared public and private compensation for insured losses resulting from acts of
terrorism.
The United States insurance market offers coverage to the majority of large
companies which ask for it in their policies. The price of the policy depends on
where the clients are residing and how much limit they buy.
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2.3. ROLE PLAYED BY US GOVT.
Congress enacted and the President signed the law in November 2002, the
Terrorism Risk Insurance Act of 2002 (The Act). This federal law provides a
federal backstop for defined acts of terrorism and imposes certain obligations on
insurers. The Act was extended for a two-year period covering Program Years 2006
and 2007. The Act has now been extended for an additional seven years through
December 31, 2014 with the enactment of the Terrorism Risk Insurance Program
Reauthorization Extension Act of 2007.
Several provisions of the initial Act have changed in the 2007 extension. Those
changes include:
Revising the definition of a certified act of terrorism to eliminate the
requirement that the individual(s) are acting on behalf of any foreign person or
foreign interest.
Extending the program through December 31, 2014.
Requiring clear and conspicuous notice to policyholders of the existence of the
$100,000,000,000 cap.
Fixing the Insurer Deductible at 20% of an insurer's direct earned premium, and
the federal share of compensation at 85% of insured losses that exceed insurer
deductibles.
Fixing the program trigger at $100,000,000 for all additional program years.

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Requiring the U.S. Treasury to promulgate regulations for determining pro-rata
shares of insured losses under the program when insured losses exceed
$100,000,000,000.
Requiring the Comptroller General to study the availability and affordability of
insurance coverage for losses caused by terrorist attacks involving nuclear,
biological, chemical, or radiological materials and issue a report not later than
one year after the enactment of the Terrorism Risk Insurance Program
Reauthorization Act of 2007.
Requiring the Comptroller General to determine whether there are specific
markets in the United States where there are unique capacity constraints on the
amount of terrorism insurance available and issue a report not later than 180
days after the enactment of the Terrorism Risk Insurance Program
Reauthorization Act of 2007.
Requiring the President's Working Group on Financial Markets to continue an
ongoing study of the long-term availability and affordability of terrorism risk
insurance.
Accelerating the timing of the mandatory recoupment of the federal share
through policyholders surcharges.
Other terms of the Act, as amended by the Terrorism Risk Insurance Extension Act
of 2005, remain unchanged.

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2.4. PRESENT SCENARIO


Prior to 9/11, the scenario was very different. Terrorism risk was not
considered a substantial enough risk and was usually included at no additional
premium in most property and casualty policies. Evidently, in case TRIA had not
bee enacted, the coverage would have been totally withdrawn.
This is exactly what happened after 9/11. Between 9/11 and the one-year period
before TRIA was enacted, terrorism insurance premiums were prohibitively
high. As a result, take-up was very low in spite of the dire need for such
coverage and the climate of fear and perceived risk that pervaded the nation.
What is more, the entire country was plunged into massive uncertainty.
After the enactment and extension of TRIA, the take-up has increased not just
among large businesses but, in the mid-sized and personal lines, as well. From
estimated 40% in2003 immediately after the enactment, it has gone up to almost
60% collectively in these sectors in 2007.
Today, the take up rates are not artificially low, in spite of a government
backstop facilitywhich shows that there is no unwarranted subsidization, and
that the program is being run on more or less commercial lines. However,
average rates for the coverage dropped from the highs by 25% on an average
between 2004 and 2005, and again by another 30% between 2005-06 because of
the provisions of TRIA and TRIEA.

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Take-up levels are spread across the country and industries, which rates the
highest in the North East and Mid West, followed by the West and South.
Industries that have gone in heavily for terrorism insurance are in sectors if
healthcare, media, hospitality, real estate, financial services, education and
transportation.
The insurance sectors as well as the potential insureds are largely adopting a
professional stance of offering coverage at reasonable rates and of going in for
coverage wherever it is merited, respectively. This was possible because of
TRIA and TRIEA. If one analyzes the natural catastrophe scenario in
earthquake-prone California, take-up rates hover around the region of 12 to
15% because of high premiums.
So, unlike what was presumed in 2002, it seems to be a foregone conclusion
today that a backstop facility that was adequate to take care of any possible attacks
would have to continue, the threat of terrorism itself continues unabated, if one
takes into account the London and Madrid bombings, as well as those in Delhi,
Mumbai, Hyderabad, etc. in 2005, 2006 and 2007 respectively, and more recently
in Baghdad, Bangalore and Ahmadabad in July 2008. Under the circumstances if
the backstop was lifted, reinsurance would become scarce, rates would harden and
reinsures might even exit the market once again, as they did after 9/11.

One can

recollect that the private reinsurers paid about $22 billion out of a total of $33
billion in insured losses after 9/11, but exited the market druid the period after that
till TRIA was enacted because of the unpredictable risk of terrorism, which was not
something any reinsurer would willingly take on. A look at the actual figures
would say why: industry estimates place the terrorism reinsurance capacity

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worldwide at around $6 to 8 billion, which is very meager as compared to
requirements.

CHAPTER NO: 3
INDIAN TERRORISM INSURANCE
3.1. TERRORISM IN INDIA
Terrorism in India can be attributed to many low intensity conflicts within its
borders. The regions with long term terrorist activities today are Jammu and
Kashmir, Mumbai,

Central

India

(Naxalism)

and

Seven

Sister

States

(Independence and Autonomy Movements). In the past, the Punjab insurgency led
to militant activities in the Indian state of Punjab as well as the national capital
Delhi (Delhi serial blasts, anti-Sikh riots). As of 2006, at least 232 of the countrys
608 districts were afflicted, at differing intensities, by various insurgent and
terrorist movements. Terrorism in India has often been alleged to be sponsored by
Pakistan. After most acts of terrorism in India, many journalists and politicians
accuse Pakistan's intelligence agency, the Inter-Services Intelligence of playing a
role.

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3.2. TERRORISM INSURANCE IN INDIA
After World Trade Center (WTC) happened, reinsurers started excluding
terrorism from coverage which in turn compelled insurers to start excluding these
risks from commercial policies as and when they were renewed.
Businesses in India are not fully covered against terrorism- related risks.
Obsessed with profit considerations corporate prefer simple covers without any
odd-on like terrorism cover. The corporate apathy to insurance coverage also stems
from competitive pressure in the market.
Projects/ businesses financed by multilateral or financial institutions and
banks are covered due to the terms and conditions imposed by the leaders. Once
the loans are cleared even state governments, leave alone businesses, prefer leaving
the assets uninsured. The strategy is driven by the need to keep the cost down. In
case of state-owned power undertakings, insurance premium add significantly to
the operations and maintenance costs.
Let us take the case of IT companies where bottom lines are better, the
companies are cash-rich and proactive. In spite of repeated warnings from
intelligence agencies, a number of domestic IT companies have not opted for
terrorism risk cover. Only multinational companies and very few domestic
companies like Infosys Technologies Ltd., Wipro Ltd., Aztec and iGATE among
others have opted for comprehensive cover that includes terrorism risk. Some
companies co0ver terrorism risk only for their units located in sensitive areas. The

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major reason for this reluctance is the desire to reduce the premium outflows and
ensure higher profits.
Leave alone the general public, even the government properties and
embassies are uninsured government opts for increased security instead of
spending on insurance cover. This is not the case in other countries such as US. In
the US, all government property is insured apart from the property related to
defense. India has to follow the suit. Only then, the message would percolate down
to the masses. If the government decides to go for an insurance cover, the foreign
reinsurers would be more than keen to provide reinsurance.

3.3. IMTP (INDIAN MARKET TERRORISM POOL)


In many countries, government acts as a reinsurer of last resort for terrorism
insurance. While they provide reinsurance at the highest risk levels, private
insurers and reinsurers cover some or all of the lower tiers of risk example France
(GAREAT), Germany (Extremus), the UK (Pool Re), and the US ( the Terrorism
Risk Insurance Act, TRIA).
India has an edge over other countries when it comes to terrorism insurance.
The terrorism cover in the country is offered by general insurance companies
through a common pool which presently has a corpus of more than Rs.1, 000crore.
Around a dozen insurance companies in India provide terrorism insurance as an
add-on cover to the regular fire insurance policy. The Insurance Regulatory and
Development Authority (IRDA) have mandated that all general insurance
companies should be allied to the common pool for terrorism insurance, set up to
compensate claims for terror attacks.

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The developed world relied on the ruling governments to establish a separate


terrorism pool to take care of probable contingencies. TRIA is a case in point. In
pleasant contrast, the India Market Terrorism Pool (IMPT) was set up in 2002 with
a corpus of Rs.200crore after attacks on the World Trade Center in New York. This
pool covers companies and institutions and liability of Rs. 750 crore per location,
including material or property loss or damage and also business interruption losses.
The pool is managed by the General Insurance Corporation (GIC).
The terrorism risk pool ensures that insurance companies are not affected
when claims emanate following terrorism incidents. The premium collected by the
insurers goes into the pool. The insurers are allowed to draw money from the pool
to compensate the claimants for damage sustained during terror attacks. Insurance
officials fear that if the spates of terror attacks continue unabated as they have the
pool of Rs. 1,200 crore could be wiped out within the next few occurrences. Post
26/11, premium rates could harden.

3.4. DEVELOPMENTS
Unlike the 9/11 attacks in the US, which resulted in companies having to
shell out more for insurance covers or entities such as airlines operating without
terrorism insurance, Indian companies can breathe easy. Because of the terrorism
insurance pool created after the terror strikes in the US, insurers said, costs will be
manageable for Indian companies and they will continue to get risk covers.

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I do not see any impact since terrorism is not new to India and now
premiums are decided within the country, said General Insurance Corporation
Chairman and Managing Director Yogesh Lohiya. Earlier, global reinsurers raised
the premium or often levied a surcharge after terrorist attacks as risk perception
changed. This resulted in companies having to pay higher premium.
The Insurance Regulatory Developmental Authority (IrDA) has mandated all
general insurance companies be allied to a common pool for terrorism insurance.
So, premium of terrorism insurance collected by all general insurance companies
flows into a common pool. Any terrorism related insurance claim is settled by
using funds from this pool.
Terrorism insurance is offered as an add-on cover and an individual would
have the choice to request the same while insuring property, said Rajive Kumara
swami, head (reinsurance), ICICI Lombard General Insurance. Unless Taj and
Oberoi hotels had insurance policies specifically covering acts of terrorism for
which they had paid an additional premium amount, the damages suffered by these
hotels during the present attack will not be compensated by the insurance company,
said Diljeet Titus, founder and managing partner of Titus & Co, a Delhi-based
commercial law firm. ICICI Lombard is the co-insurer for Taj Mahal Hotel.
It could not be ascertained from the two hotels, which are under siege if they
have terror covers or not. Lohiya, however, said losses did not appear to be
significant. In any case, he said, losses up to Rs 700 crore were covered by the
pool.

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TERRORISM RISK IN INSURANCE SECTOR


For additional losses arising out of a terror strike, separate protection from
global reinsurers is in place.
Insurers said that with terror attacks on the rise, the number of individuals
opting for terrorism insurance is on the rise. Companies such as ICICI Lombard
General have advised customers to call their toll-free number to register claims
arising due to the attacks in Mumbai.

MEGA RISK PROJECTS GETS INDIAN INSURANCE COVER


State-owned insurance companies are looking at the possibility of providing
terrorism cover to several mega risk policyholders including Dabhol Power
Company and Reliance's Jamnagar refinery following the decision of global
underwriters to withdraw insurance against terrorism.
Indian Petrochemicals Ltd plant in Baroda and Indian Oil Corporation's
Cochin refineries also belong to the mega-risk category. In the absence of a cover
against terrorism, claims arising out of any terrorist attacks would not be honored
by insurers.
When contacted, New India Assurance chairman and managing director K N
Bhandari, who is also the chairman of General Insurers' (Public Sector)
Association of India or Gipsa said that the four state-owned general insurers would
meet on Thursday to chalk out a strategy for mega risk policies. He said that

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around 10 mega policyholders in India including some HPCL and BPCL refineries
have to do without a terrorism cover.
Mega risk policies are those where the probable maximum loss, which is a
percentage of total assets given the spread of these projects, is estimated at over Rs
10.54 billion.
Given the size of the Indian non-life insurance market, almost the entire
amount, less the mandatory 20 per cent premium which is to be ceded with the
General Insurance Corporation, is reinsured with global reinsurers which results in
significant dependence on the international market.
GIC also keeps only a small portion of the sum that is reinsured with it and
follows a treaty arrangement with other global players in its segment of operation.
In case of fire and engineering policies, a 10 per cent surcharge has been levied to
generate the resources following the global decision by insurers.
In India, till the September 11 attack on US, a separate premium for
terrorism in most business segments was not charged. Though claims from terrorist
infested areas like Jammu and Kashmir, Punjab and the north-east did come to the
insurers they were treated as normal losses, unlike the present global norm where a
separate charge is being levied.
3.5. LIMITATIONS
Terrorist attacks on the Trident Oberoi and Taj hotels and the Nariman
House in Mumbai have brought to the fore the limitations of the existing terrorism
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pool in that it does not insure public liability and personal accident. The terrorism
pool, which has a corpus of about Rs 1,000 crore, at present insures only damage
to property.
The Mumbai attack is on private property and the loss arising from public
liability (liability of the hotel towards the guests and visitors in it) and personal
accident may be larger as the damage to properties of Trident Oberoi and Taj hotels
will be paid by insurers from the terrorism pool.
But if the hotels had taken a cover against public liability and personal accident,
the burden will devolve on the insurance companies, who will receive no help from
the terrorism pool.
Mr S.S. Gopala Rathnam, Managing Director, Cholamandalam MS General
Insurance, told Business Line that the issue of insuring public liability and personal
accident was raised during the last terrorism pool meeting. Most insurers felt that
having a surplus (Rs 1,000 crore) and not providing sufficient coverage did not
make sense, he said. The terrorism pool was set up in the aftermath of 9/11 incident
in the US as many insurance and re-insurance companies suffered major losses and
avoided providing cover.
Therefore, the terrorism cover, as a peril was excluded from direct insurance
coverage. Each country developed its own terrorism pool where the premiums
for covering terrorism risks will be transferred to a major corpus. In India, the pool
is managed by the General Insurance Company.

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CHAPTER NO: 4
FACTS ON TERRORISM INSURANCE
4.1. PRICING
Internationally, product pricing in the case of terrorism insurance is difficult
for a host of reasons. For one, it is difficult to predict the types and frequency of
future attacks. For another, it is equally difficult to spread the risk of losses from
terrorism over a sufficiently large base of clients. This makes it difficult for
insurance companies to offer affordable policies. The governments also frequently
regulate the types that need to be covered and the rates that can be charged.
The risk assessment is carried out on the basis of the loss experienced. It is
evaluated in terms of the number of people who buy that cover. Two things will
happen: The Mumbai incident probably will increase the cost of terror-related
insurance as more companies and individuals opt for coverage. The risk will get
pulled out over a large segment of people. On the other hand, pricing would be
guided by the loss experienced. Proper pricing will start evolving over a period of
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time. But in the immediate future prices are bound to go up on account of the
nature of the Mumbai attacks and the nature of the loss. The potential reinsurance
losses to the London reinsurance market will certainly prompt terrorism
underwrites to take a relook at their terrorism rates for India.

Premium for terrorism cover were around Rs. 0. 25 per Rs1, 000 of the total
sum insured, and would most likely be revised soon in the wake of the Mumbai
attacks. Reports suggest that premiums could go up by 50% or more. Terrorism
insurance is mostly offered as a rider or add-on cover to the main policies by
domestic insurers in India. Internationally, it is available even as a stand-alone
policy. The IRDA is being urged to consider approving a approving a proposal that
will allow terrorism cover to be sold as a stand-alone policy.

4.2. DEMAND FOR COVER


Post Taj and Oberoi incidents, scores of luxury and star-rated hotels
institutions and buildings, are rushing to enhance the scope of existing insurance or
seek fresh cover. Non-life insurers are seeing a surge in enquiries. Even top
executives are seeking additional cover. The number of individuals opting for
terrorism insurance is on the rise due to heightened awareness. 26/11 has made real
estate developers worry about the safety of their projects and therefore a rush for
insurance cover. Currently, only a few developers like Delhi-based DLF take
insurance coverage for their projects. Most of the developers take insurance
coverage for some specific projects only.

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The IRDA expects the industry to create new and innovative policies to
provide cover against terror attacks. The terrorism insurance products will have to
be upgraded and the rate of premium might change depending upon the evolution
of new products that the industry may come up with. In view of more and more
entities opting for terror insurance, the funds in the common terror insurance pool
will be increasing.

4.3. DIRECTORS & OFFICERS LIABILITY INSURANCE (D&O) AND


TERRORISM INSURANCE
Liberalization, privatization and globalization have opened new vistas for
insurance industry. Some of the insurance products, which had low profile before
liberalization, such as the Directors & Officers Liability Insurance (D&O) and
insurance against terrorism risks, have gained momentum in the new insurance
regime. The directors are the agents of shareholders of a company. In
administration and management of a company, they play a multidimensional role.
In the process of administrative actions and corporate management, some of the
actions and decisions initiated, may directly or indirectly influence the working of
the company and the company may face financial and non-financial risks. The
company may incur liabilities to the various parties who suffer a loss because of
the actions and decisions of the company and its directors and officers. The
directors or officers may get protection to a certain extent under the provisions of
various laws. They may incur liabilities as some of the decisions taken in good
faith may fail and they may be asked to compensate the losses. At this point of
time, the insurance policies covering the risks of liabilities of Directors and
Officers come to the rescue of the companies. Terrorism is one of the burning
issues of socio-economic factors and poses a challenge to the government. Every
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society, across the globe has either experienced the risk of terrorism or is under a
threat in one or the other shape. Insurance companies have designed some policies
to secure property and persons against terrorism risks.

CHAPTER NO. 5
TRIA,

TRIEA

AND

TRIREA

(ACTS OF TERRORISM INSURANCE)


5.1.

TRIA

(TERRORISM

RISK

INSURANCE ACT)
The Terrorism Risk Insurance Act
(TRIA) was designed to stabilize the property
and casualty insurance market following the
Sept. 11 terrorist attacks. TRIA created a
federal terrorism reinsurance program to serve as a federal backstop for terrorism
insurance in the case of future terrorist attacks. The law requires the federal
government to cover 90 percent of terrorism-related losses, up to a total of $100
billion, once insured losses reach certain trigger levels. Insurers, meanwhile, are
required to offer terrorism coverage to commercial policy holders, in return for the
federal government backstop. TRIA applies to only commercial property and
casualty risks.

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TRIA was passed as a temporary measure to help stabilize the economy
following September 11. The Act was originally scheduled to expire at the end of
2005. However, Congress passed a two-year extension, and TRIA is now due to
expire on December 31, 2007. The insurance industry will encourage Congress to
pass a further extension or implement a permanent program to ensure that
terrorism insurance is available, before TRIA expires.
A report from Treasury indicates that TRIA has worked well but should not
be made permanent. Some members of the Congress are in agreement with the
report. Others support a permanent extension of the Act. Congress is expected to
address the issue in 2007.

IMPORTANCE
Terrorism is an uninsurable risk unless there are limits to protect against
catastrophic terrorism exposure. A federal backstop is necessary to provide
coverage for terrorism losses above the capacity that the private insurance and
reinsurance markets can reasonably bring to bear. Insurance has an important role
in our economy by helping people recover from the unexpected. In that respect, the
Act is good for the nation, good for the economy and good for commercial
customers.
TRIA does not impact State Farm as much as other insurers, because TRIA
does not apply to personal lines insurance, such as personal homes and autos,
which are the largest share of our business. Also, we dont insure the kind of
business the bill was primarily designed to cover, such as large commercial
buildings and construction projects. State Farms commercial business is focused

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on smaller businesses and organizations which tend to be spread out
geographically rather than concentrated in one area.

5.2. TRIEA (TERRORISM RISK INSURANCE EXTENSION ACT)


The US Congress took a midway approach and barely days before the expiry
of TRIA a two-year modified extensionthe first extensionknown as terrorism
as Terrorism Risk Insurance Extension Act (TRIEA, 205) was passed. So, in the
midst of a debate that rocked the entire nation about whether TRIA would be
extended after the sunset clause become active on December 31, 2005, the
modified version of TRIA became operational on January 1, 2006 for a period for
two years, till January 208.TRIEA, the modified Act, was a slightly toned down
version of the original TRIA where the government continued with the backstop
facility, although primary insurers now had to pay higher deductible and copayments. This was perceived to be in the fitness of things because indefinite and
intensive government involvement in private insurance often leads to moral
hazardsamong many other draw backs.

IMPORTANCE
The greatest success TRIEA is that they have provided stability to the
private insurance markets. And that is in spite of the fact that the funds provided by
this backstop have not been tapped even once, and not a single tax dollar has been
spent from these funds on terrorism linked insurance. Of course, one has to take

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into account that after 9/11, there have been no acts of terrorism of that magnitude.
So, the importance of the extension is briefed below:
It come from the fact that there was a deeper underlying objective than what
merely met the eye and protecting the insurance sector was actually a secondary
fallout of TRIAs provision; the primary objective was to give enough comfort
to insurers to enable them to offer much-needed insurance for terrorism to
consumers at premiums that are affordable. The insurance sector could do that
largely on the strength of the psychological comfort derived from TRIA and
TRIEA. The signal sent out was that although it was not necessary to evoke the
Act during this period, the government was always there as reinsurer of last
resort should the need have arisen.
Even more than this was the comforting expectation that in a climate where
government involvement was statutorily spelt out through TRIA or other similar
Acts, the government itself would work in partnership with private insurers to
develop a pre-emptive plan and course of acts before an attack rather than
reacting after crisis. This could only happen it its involvement was total, as
through TRIA and its extensions.
This partnership would result in better-integrated disaster management
programs more funds for predictive and pre-emptive action, and greater
competency building trough joint action brought to the table.
Most terrorism insurance is meant for commercial insureds, who need it not
just for security, but for may other peripheral purpose such as to get a mortgage,
expand business premises or go in for a new construction, failing which they
could run into massive losses because of interruption in their business. Very
negative fallout of 9/11 that went almost publicized was that a lot of important

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construction activity encountered a stalemate in the US soon after 9/11 since
home loan lenders insisted on terrorism coverage as a precondition to lend, but
insurers were not willing to offer coverage for terrorism. This was the real
stability afforded by TRIA when it was enforced later. In fact, 9/11 construction
work in many important projects in the US was stalled because of terrorism risk
exclusion clauses which would otherwise have gone down precipitously.

5.3. TRIREA (TERRORISM RISK INSURANCE REVISION

AND

EXTENSION

ACT)
At a time when the sunset clause for TRIEA was due shortly (on January
1,2008), there has been less vocal debateunlike beforeon whether the Act
should at all be extended. What it implied is that today, it is given that the federal
backstop facility, albeit in a modified form, is an imperative for more than one
reason. And so, work towards the next amendment passage of this modified Act
went on at feverish pace well before the TRIEA sunset clause on January 1, 2008,
in the form of H.R.2671The Terrorism Risk Insurance Revision and Extension
Act of 2007 (TRIREA). On December 18, 2007, the House of Representatives
gave final approval to H.R.2671, by a bipartisan vote of 360 to 53. It extends the
federal backstop facility for a period of seven years (up to 2014).
Since the Bush administration has the power of veto Congress proposal,
much depended on there stance. The Bush administration had stipulated three
objectives which could underline the renewal of TRIEA:

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The program should remain of a short-term nature, and therefore temporary.
Its scope should not be expanded.
Private insurers should continue to increase their retentions.
But, TRIEA has not come back on these terms:
The extension this time is for the next seven years.
In scope has been expanded to include both foreign and domestic terrorist
attacksthere was a widespread demand for this.

5.4. REASONS FOR THE MODIFICATIONS


The reasons for the two extension provision are as follows:
I.

There is a widespread realization today both among insurers as well as the


government that it would take a while for a full-fledged private catastrophe
market to develop.

II.

Resetting renewals of the Act at the interval of two to three years creates a lot of
uncertainty in the minds of insurers, and actually inhibits them from attaining
self-sufficiency in the long run. Therefore, the extension this time around would
need to be of a substantially longer period so that insurers do not have to
grapple with piecemeal efforts to set up a self-sufficient private market.

III.

Given the fact that NBCR episodes are high probability, apart from leading to
large insured losses wherever they are covered by the federal backstop, the
government would like draw the line at this, for the present. However, there is a
provision for periodic reviews which shows the governments concern on this
issue. Here, it must be mentioned that the contribution of organizations like
Coalition to Insure Against Terrorism (CIAT) which has bee working closely

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with the Congress and other stakeholders to have the program renewed and also
get new enhanced features included has been instrumental in a major way in
achieving these objectives.
IV.

What are the signals that came through from these extensions and
modifications? Merely this: that there was a clear refusal on the part of the
government to go in for a long- term commitment at the very outset. One reason
was that government waiting to see whether a resourceful private market did
develop between 2002 and 2005, or not. It did not. Even if that did not happen,
the second three-year extension sent clear signals to private insurers that they
should continue with business as unusual as far as possible and not take
government involvement as a matter of right. This, in turn, is expected to hem
in the typical dangers that are associated with government intervention in
insurance, i.e., moral hazard and adverse selection as well as crosssubsidization of affected groups through higher taxes imposed on citizens of
states that have not been affected. The other sobering influence was the higher
deductible and co-payments that private insurers were required to pay with each
revision, showed the governments purpose not to crowd out private insurance,
but only to give it time to stabilize itself.

THE TABLE SHOWS THE TWO EXTENSION OF TRIA:

Period

Coverage

TRIA, TRIEA AND TRIREA : SOME PERSPECTIVES


TRIA
TRIEA
TRIREA
November 2002 to
January 2006 to
January 2008 to
December 31,

December 31, 2007

December 2014

2005
Most commercial

Many P&C

Many P&C

and P&C business

business

business, foreign
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and domestic acts of
terrorism, NBCR
coverage only when
the underlying
property is insured
against it
Exclusions

Health, crop, flood

All the above, farm

covered by

owners multiperil,

National Flood

commercial auto,

Insurance, life,
Trigger

medical
The event is

US $5 million until

US $100 million

certified as an act

March 31, 2006

from December 31,

of terrorism after

US$5 million from

US $5 million in

march 31, 2006 to

insured losses

December 31, 2006

2007

until further

notification

US $100 million in
Deductible

15% (from 2002

2007
17.5% (2005-2006)

Retain current level

to 2005)

20% (2007)

of insurer
deductible at 20%
of direct earned
premium for
insured terrorism

Federal
reinsurance

90%

90% (2005-2006)

losses
Retain current level

85% (2007)

of 85% federal
reinsurance and
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15% insurer co pay

5.5. DEVELOPMENTS
Payment of TRIA Losses Above $100 Billion: President Bush signed a longterm extension of the Terrorism Risk Insurance Act (TRIA) on December 20,
2007. The law included a provision that requires the U.S. Department of the
Treasury to establish a process for the allocation of pro-rata payments in the
event that terrorism-related insured losses exceed the federal governments
annual $100 billion program cap. The law states that no insurer may be required
to make any payment for insured losses in excess of its deductible and its share
of insured losses.
The Treasury report on the pro-rata payment process submitted to Congress in
April 2008 sets out goals for implementation but does not include a date for
completion. The law requires final regulations by August 22, 2008. The goals
include reducing the potential for inequitable treatment of policyholders in
terms of the timing and location of losses and the policyholders insurer,
reducing potential litigation and adequately addressing changing circumstances
presented by subsequent events or by the development of new, more accurate
information regarding insured losses.
Availability and Affordability of Coverage: In July 2008, the U.S.
Government Accountability Office (GAO) issued preliminary results of a study
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on the availability and affordability of terrorism coverage in large metropolitan
areas. The report said that while commercial property terrorism insurance seems
widely available at rates policyholders believe is reasonable, certain types of
policyholders may have more difficulty obtaining the coverage amounts they
need at prices they view as acceptable. These policyholders are typically
owners of high-value properties in urban areas where there is a high
concentration of large buildings that are seen as potential terrorism targets. The
GAO said that some insurers remain concerned about their exposure to
terrorism losses and their efforts to minimize potential losses appear to be the
primary reason some policyholders are facing challenges in obtaining coverage.
There no consensus within the industry on whether TRIA should be modified,
the GAO noted. However, it summarized several proposals, including lowering
insurer deductibles in areas where an attack has taken place, allowing insurers
to establish tax-deductible reserves for terrorist attacks and changing the
Internal Revenue Code to encourage the issuance of catastrophe bonds, see
Insurance Issues Update reports on Reinsurance and the Background section to
this report.
Terrorism Insurance Market: A report from insurance broker Marsh Inc.
indicates that take-up rates for terrorism coveragethe percentage of firms
buying the insurancehave increased significantly since 2003, when Marsh
began tracking purchases made by clients. In 2003, only 27 percent of survey
participants bought terrorism insurance but, according to the latest Marsh study
of trends, in 2006, 59 percent of the 1,437 clients participating in the survey
purchased the coverage, even though property insurance rates overall increased
that year, up slightly from 58 percent in 2005. Companies most likely to include
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terrorism coverage as part of their property insurance were the largest firms and
entities, including financial services institutions, real estate businesses, utilities,
and educational and health care facilities. The highest take-up rates were in the
Northeast and Midwest, but every region had a take-up rate greater than 50
percent. Ninety percent of Marsh clients that purchased the coverage did so as
part of their property policies rather than as a stand-alone coverage, Marsh
notes.
Potential Losses: Risk Management Solutions (RMS), a risk modeling firm,
said in July 2008 that estimated insured terrorism losses rose 8 percent in the
past year to $1.6 billion, due mostly to the growing threat of chemical and
biological attacks. RMS also said that terrorism targets are more likely to be in
the commercial or private sector, such as sports stadiums, now that
governments counter-terrorism efforts have been stepped up. Since 2001 some
two dozen potential terrorist plots have been uncovered in the United States,
mostly targeting New York or Washington.

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CHAPTER NO. 6 COUNTRIES WITH LONG-TERM TERRORISM


INSURANCE PROGRAMS
According to the policy agenda of The Real Estate Roundtable, the following
countries are the only ones in the world with long-term terrorism insurance.
1.

Australia

2.

Austria

3.

Finland

4.

France

5.

Germany

6.

Israel

7.

Namibia

8.

Netherlands

9.

Russia

10.

South Africa

11.

Spain

12.

Switzerland

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13.

Turkey

14.

United Kingdom

SPECIAL TERRORISM INSURANCE PROGRAMS IN OTHER COUNTRIES


The United States is not the first country to establish a terrorism insurance
program. Some countries created programs to cover to terrorism after September
11 or earlier, following a terrorist attack on their own soil. Below are some
examples.

AUSTRALIA: Legislation was passed in 2003, under which terrorism exclusions in


commercial policies are nullified once the government has declared that a terrorist
incident has occurred. The legislation also created a reinsurance pool to cover
insurance company losses from property, business interruption and third-party
liability coverages, subject to a certain insurance company deductible, about 4
percent of property insurance premium. Insurers pay premiums into the pool which
is back-stopped by the government. The program covers chemical and biological
attacks but not nuclear attacks.

AUSTRIA: A terrorism pool has been in operation in Austria since January 2004.
The pool provides reinsurance protection against property damage and business
interruption up to a certain limit. Insurers issue a separate terrorism policy and then
transfer or cede the business to the pool. Participation in the pool is voluntary but
almost all insurers belong.

BELGIUM: Under requirements that took effect in May 2008, all insurers must
offer coverage for terrorism under most of the policies they issue, with the
exception of coverage for certain kinds of risks such as nuclear facilities and mass
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transportation mechanisms such as trains, airplanes and ships. Insurers are not
required to offer stand-alone policies for terrorism. The law creates a terrorism
pool with total limits of 1 billion Euros, divided into three tiers: direct market, first
tier 300 million Euros; reinsurance, second tier 400 million Euros; and the Belgian
government, upper tier, $300,000.

FRANCE: Under a law passed in 1986, terrorism must be covered. Since 2002,
terrorism has been covered by a reinsurance pool to which terrorism risk above a
certain retention level is transferred. Insurers pay premiums to the pools which are
divided up among the participants in each of the four different layers of risk with
the government-owned Caisse Central de Reassurance (CCR) receiving 10 percent
of premiums for providing the top layer of unlimited coverage. The government
pays for all terrorist claims that exceed a specific amount. Premiums are set
according to the insured amount, not the riskiness of the location.

GERMANY: Private insurers cede commercial insurance coverage written above a


certain limit to a pool. The pool, in turn, cedes all its risk to other insurance
companies, which act as reinsurers. The ultimate layer of protection, for which
insurers pay reinsurance premiums, is provided by the government. The program
was extended for two years at the end of 2007 and after 2009 will probably be
renewed again but for a lower amount, Germanys Finance Minister said in making
the announcement of the extension. The government pays claims above an
aggregate amount.

NETHERLANDS: A terrorism reinsurance company was created to reinsure its


member companies who retain a percentage of the risk. Coverage is limited per
member and in the aggregate. Life and property/casualty insurers participate in the
pool, as well as health insurers.
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SPAIN: Beginning in 1941, Spain has had a government-sponsored but privately
managed pool which provides coverage against injury, property damage and
business interruption due to catastrophes, natural and man-made. Personal lines as
well as commercial are covered. Coverage for extraordinary risks is mandatory.
The original need for terrorist coverage stemmed from acts of violence carried out
by the Basque separatist movement, which has been active in Spain for many
decades. The 2004 Islamic terrorist bomb attacks in Madrid exacerbated the risk.
Private insurers may provide catastrophe coverage but they are still required to
make payments to the pool, which is backed by an unlimited guarantee from the
government.

SWITZERLAND: Beginning in 2003, insurers can cede all property risk insured for
a sum above a certain amount to a reinsurance facility.

UNITED KINGDOM: The government formed a mutual reinsurance pool for


terrorist coverage in 1993, following acts of terrorism by the Irish Republican
Army. Insurance companies pay premiums at rates set by the pool. There are two
geographic zones, one for major cities, with an adjustment for a "target risk," and
the other for the remainder of the country. The primary insurer pays the entire
claim for terrorist damage but is reimbursed by the pool for losses in excess of a
certain amount per event and per year. This is based on its share of the total market.
The maximum industry retention increases annually per event and per year.
Following the World Trade Center disaster, coverage was extended to cover all
risks, except war, including nuclear and biological contamination, aircraft impact
and flooding, if caused by terrorist attacks. The government acts as the reinsurer of
last resort, guaranteeing payments above the industry retention.

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6.1 ROLE PLAYED BY GOVERNMENT IN


TERRORISM INSURANCE
Prior to September 11, 2001 attack; terrorism
insurance was available from private market insurance firms in a number of
countries. But, after 9/11, the private insurers and reinsurers were unwilling to
provide such insurance with growing concern of major losses to the industry in the
absence of government support. Today, in most countries where terrorism
insurance for commercial properties is offered, it is only due to the intervention of
government. The government intervention can be in the form of primary insurer,
responsible for all insurance functions, including defining the coverage, setting the
prices, and bearing the risk. This type of intervention is observed in countries like
Israel where complete coverage for injury, life and property risks arising from
terrorism is given to all persons without direct cost. The government absorbs the
entire risk, which is financed from general tax revenues. Even Northern Ireland
offers a parallel compensation program for losses due to terrorism.

6.2. THE COUNTRIES OFFERING GOVT-BACKED INSURANCE


Most countries have government backed terrorism pools nowadays and
although insurers pay premiums, or, are in some cases bound to co payments,
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government themselves have become quite munificent. The backstop facility is
now extended to a wide gamut of risks and can sometimes offer unlimited
reinsurance coverage. Some governments as in the United Kingdom have gone a
step further in terms of professionalism and have adopted a well-chalked about
public-private partnership model in the running of these pools and other programs
offered.

UNITED KINGDOM: In 1993, the government set up a terrorist reinsurance pool,


to which insurance companies pay premiums. The premiums are based on the
geographical location of the risk. There are two geographical zones, one for large
cities, and the second zone for the rest of the country. Premiums are fixed with a
further adjustment on the basis of target risk. Insurers initially pay the entire
claims amount, but are reimbursed by the pool for the losses that exceed a certain
amount per event, on an annual basis. Industry retention goes up every year, with
the government guaranteeing payments above the level. Following 9/11, the pool
stated extent coverage for nuclear, biological, weapon risk, aircraft impact and
other risks caused.

AUSTRALIA: Under 2003 legislation, all terrorism exclusions in commercial


insurance covers become null and void once the government announces the
occurrence of an act of terrorism. Subsequent to the passage of this Act, a
reinsurance pool has been launched to offer cover to insurance companies for
losses arising out of property, third party liability and business interruption.
Insurance companies pay a deductible equivalent to 4% of their property insurance
premium. There is a federal backstop facility, which covers chemical and
biological attacks but not radiological and nuclear ones.

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FRANCE: Terrorism covers have been offered here since 1986. Since 2002, it has
been covered by a reinsurance pool. Terrorism risk above a certain level is
transferred to the pool. The fund is created by insurers paying premiums to the
pool, which is earmarked for each insurer, in each of the four layers of risk. In
keeping with the federal backstop facility here, the government pays all terrorism
insurance claims above a predetermined amount. Premiums are governed by the
amount of cover and not necessarily by other risk factors.

BELGIUM: The laws here have recently undergone a change and under the new
law that will become effective in January 2008, government backstop coverage
will be available up to euro 1 billion, inflation adjusted annually. Insurers will pay
the initial contribution of euro700 million to the fund, with the government paying
the rest. A Committee formed by insurers will be deciding whether an event meets
the definition of an act of terrorism.

GERMANY: Private insurers transfer all commercial insurance coverage above a


certain limit to a pool. The highest layer of insurance claims is borne by the
government. Insurers pay a reinsurance premium for transferring this risk to the
government. This procedure will continue till December 2007, and become null
and void unless it is renewed.

SPAIN: Spain has had a long-standing catastrophe coverage program dating back
to 1941. This pool is owned by the government but managed by private reinsurers.
It offers personal and commercial coverage for property and casualty, and business
interruption lines caused by natural and man-made catastrophes. Private insurers
have to contribute to a pool even if they offer coverage themselves. The
government provides an unlimited guarantee for the pool.

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CHAPTER NO.7 CHALLENGES


Terrorism presents many challenges to the global insurance industry. There
is greater potential today for exceptionally large losses due to terrorism than the
past decade. Today, there are an increasing number of religion-based terrorist
groups, many of whom advocate mass casualties (Hoffman.1998; Stern, 2003;
Sandler and Enders; 2004). Also, the decisions
taken by the government on various policies
can provoke the terrorist groups to attack a
certain country. In addition to this, actions by
both the private and public makes the risk of
future terrorist events extremely difficult to
estimate.
Insurers

find

difficulty

in

pricing

terrorism insurance because of uncertainty associated with the risk. Also, the data
on terrorist groups and their activities are generally not revealed by the government
for national security reasons. Hence, it presents a problem for modelers to predict
the terrorist attacks in the future. The existence of interdependencies also poses a
challenge towards the pricing of the policy. Many firms have refrained themselves
from investing in protection because they know that the lapse on the par of others
can greatly affect them even though they take plenty of protection because to avoid
them. In theory, a social insurance program can institute regulations and standards
to reduce these negative externalities to achieve a socially optimal level of
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investment in protection, but it may not be easy to implement these measures
(Kunreuther and Heal, 2003; Heal and Kunreuther). The 9/11 events as well as the
anthrax attacks, have established a new kind of interdependent vulnerability. In the
case of the 9/11 attacks, security failures at Bostons Logan airport were
responsible for the crashes at the World Trade Center, the Pentagon and in rural
Pennsylvania.

7.1. RESPONSE BY GLOBAL PLAYERS


Terrorism Risk Insurance Act (TRAI) in US came into existence on
November 26, 2002. The intention of TRAI was to offer terrorism coverage to the
commercial policyholders and to prevent potential insolvency arising from
underwriting terrorism risks. Prior to 9/11 attack, terrorism risks for property were
covered under all-risks policies, where all hazards were covered except the named
exclusions. But the catastrophe of 9/11 events compelled insurers to exclude terror
from property policies. The intention of the enactment was to give time to private
insurance markets to stabilize and build capacity for this peril thereby protecting
the consumers interest. But due to insufficient insurance industry capacity and
limited scope for covering certified acts of terrorism. TRAI was modified as
Terrorism Risk Insurance Program Reauthorization Act of 2007(TRIPRA)
extending TRAI till December 31, 2014.
Austrian insurers in 2002 had created The Austrian Terror Pool in response
to the changing perception of risk following the growing threats of terrorist events.
They have come up with a separate policy for property damage and business

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interruption arising from acts of terrorism. The cover against terrorism is optional;
however, a majority of Austrian Insurance Association members belong to the pool.
Belgian has come up with draft laws with respect to terrorism insurance,
which is expected to become law shortly. The Act guarantees the cover of terrorism
claims up to a global annual limit of Euro 1 billion which can be modified by the
government depending on the development of the economy. The participation to
the pooling agreement is not compulsory. Each participant will shell out Euro 700
million and the Belgian government will make a contribution of Euro 300 million.
In case of no agreement between the Belgian government and the participants of
the fund, the discretion power lies with King. In absence of Kings decision the
Belgian government compensates up to a maximum of Euro 300 million.
In 2002, the Association of German Insurers and the German government
formed Extremus, a German specialist company covering terror-caused property
damage. The capacity provided on an annual aggregate basis is Euro 10 billion.
Euro 2 billion of capacity is placed with domestic and foreign insurers as well as
reinsurers and Euro 8 billion is provide by the German government.
Israel has two different government-backed programs which provide
property-casualty and life and health insurance. The Arab War Risks Insurance
Syndicate established in 1981 is a group of approximately 110 member insurance
and reinsurance companies from 18 Arab countries. Its key objective is to help the
insurance companies situated in the Middle East and providing war cover during
the Iran-Iraq War.

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After the 9/11 incident many countries have become more conscious of
terrorism risk and have come up with new approaches to overcome it. This became
essential as reinsurer companies refused to renew the commercial policies which
were having coverage against terrorism and started withdrawing terrorism cover
from them. Reinsurers started excluding the damages caused perils other than fire
and explosion or started charging very high medium thereby making it
unaffordable. Still, there are some countries like Italy, Norway, Portugal, Sweden,
Malaysia, Philippines, Argentina and Mexico where there is no terror pool or
government participation in terror coverage.

7.2. Difficulty in Insuring Terrorism Risk


From an insurance viewpoint, terrorism risk is very different from the kind
of risks typically insured. To be readily insurable, risks have to have certain
characteristics.
The risk must be measurable. Insurers must be able to determine the possible
or probable number of events (frequency) likely to result in claims and the
maximum size or cost (severity) of these events. For example, insurers know from
experience about how many car crashes to expect per 100,000 miles driven for any
geographic area and what these crashes are likely to cost. As a result they can
charge a premium equal to the risk they are assuming in issuing an auto insurance
policy
A large number of people or businesses must be exposed to the risk of loss
but only a few must actually experience one so that the premiums of those that do
not file claims can fund the losses of those who do. Losses must be random as
regards time , location and magnitude.

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In so far as acts of terrorism are intentional, terrorism risk doesn't have these
characteristics. In addition, no one knows what the worst case scenario might be.
There have been very few terrorist attacks, so there is little data on which to base
estimates of future losses, either in terms of frequencythe number of attacks per
yearor the size of the losses, known in insurance jargon as severity. Terrorism
losses are also likely to be concentrated geographically, since terrorism is usually
targeted to produce a significant economic or psychological impact. This leads to a
situation known in the insurance industry as adverse selection, where only the
people most at risk purchase coverage, the same people who are likely to file
claims. Moreover, terrorism losses are never random. They are carefully planned
and often coordinated.

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RECENT CASES OF TERRORISM INSURANCE IN INDIA


About Taj & Oberoi
The material cost of the terror attacks on Mumbai's Taj and Trident Oberoi
hotels has been a mystery till now. Insurance value, costs, and losses are all guess
estimates, with different figures trying to explain exactly how much the damage
will cost to repair.
Even as appraisers try and quantify the losses at
the Taj and Trident-Oberoi, terror insurance is now on
the mind of many a business entity. Coverage under
terror insurance can be accorded for loss of or damage
to property, and also for losses on account of
consequential business interruption.
The General Insurance Company (GIC) has a
pool of Rs1, 200 crore to manage, mandated by the Insurance Regulatory and
Development Authority (IRDA).
Media reports suggest that the Taj Hotel was insured for over Rs1, 000 crore,
being one of 2.5 lakhs companies or institutions covered by terror insurance from
the pool. They also suggested that till now, claims totaled just around Rs15 crore.
Terror insurance coverage is usually on the re-insurer's terms and premiums, which
vary according to an analysis and perception of the proposed risk.
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Following the terror attacks on Mumbai hotels, premiums for terror


insurance policies are set to escalate, reports said. IRDA officials are reported to
have met in Hyderabad to thrash out the details about revising insurance rates for
providing terrorism cover.
Insurance officials fear that if the spate of terror attacks continues unabated
as they have this year, the pool of Rs1, 200-crore could be wiped out within the
next few occurrences. Around 12 public and private sector insurance companies
that provide terrorism insurance cover as an add-on cover to the regular fire
insurance policy.
Premiums for terrorism cover were around Rs0.21 per Rs1, 000 of the total
sum insured, and would most likely be revised soon in the wake of the Mumbai
attacks. Reports suggest that premiums could go up by 50 per cent or more, and the
IRDA was reported to being urged to consider approving a proposal that will allow
terrorism cover to be sold as a stand-alone policy. Other reports estimated the total
losses at the Taj and Trident-Oberoi hotels at around Rs800 crore, with estimates of
annual premiums paid by establishments across the city to cover against terrorism
at around Rs50-60 crore.

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ATTACKS IN MUMBAI HIKE DEMAND FOR TERRORISM COVER
Terrorist attacks in Mumbai have caused a rise in demand for terrorism
cover in demand for terrorism cover in India as corporate and individual
businessmen take no chances and insure their lives and properties against such
attacks, which have increasingly befallen the country.
Insurance companies, however, feel that the increased demand will neither
change the way terrorism insurance is sold in the country, nor drive the premium to

go up. They currently market terrorism insurance along with personal accident and
fire insurance covers. The common terrorism pool set up by Indian insures has over
Rs.1000cr ($201.7million) as a result of which insures are not expected to demand
additional premium from policyholders for protection against terrorism.
Any claim to be paid for terrorist attack is provided by the pool. Basic life
insurance policies do not exclude death due to such attacks. But additional riders or
add-on covers such as hospitalization and critical illness exclude loss of life
resulting from war, hostilities or terrorist attacks.

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PROPERTY LOSS IN MUMBAI COULD HIT $600 MILLION
Insured property claims arising from the terror attacks in Mumbai could
reach $600million, which is equivalent to Rs.29.5 billion, according reinsurance
brokerage, Guy Carpenter. Apart from property insurance claims, insurers face
claims for loss of business, lives lost and public liability.
Sites that were hit included two luxury establishments the Taj Mahal Hotel
and Oberoi Hotel along with the Leopold Caf, Chhatrapati Shivaji railway station,
Cama Hospital and the Nariman House Jewish Center. These locations were badly
damage by explosions, fire and gun battles. One estimates places the total property
losses incurred by the total property losses incurred by the two hotels alone at up to
Rs.8 billion. While the Taj is insured by Tata AIG, the Trident- Oberoi Hotels are
insured by state owned New India Assurance. Both insurers appointed assessors to
survey the extent of the damage and estimate claims. Owners of the Taj have said
that the insurance policy they had bought was sufficient to cover the losses.
Besides, the cost of reconstructing the damage properties, it is understood
that insurers will also have to compensate the owners for loss of business. Primal
Shah, property insurance surveyor said, The loss from interruption of business for
Taj is expected to be in the range of Rs. 300 crore. The loss for Trident Oberoi is
estimated to be around Rs.50-75 crore for three months.

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INDIAS TERROR INSURANCE POLL SUFFICIENT TO COVER CLAIMS
Indias terrorism risk pool, standing at about Rs. 13 billion, would be arising
from the Mumbai attacks, according to Indian media reports citing a senior official
of the General Insurance Corporation of India (GIC), which manages the fund. As
the huge terror payouts are likely to deplete the pool, however, insurers are
expected to pump in additional funds to replenish it. So far, no estimate has been
made of the replenishment amount. The GIC official said that if the claims were on
the high side, then there would be a need to increase the premium for terror cover
to replenish the pool. The Insurance Regulatory and Developments Authoritys
(IRDA) approval will be required to increase the pool premium. IRDA expects the
industry to create new and innovation policies to provide cover against terror
attacks, J Hari Narayan, IRDA Chairman, speaking at a business seminar ,said
Terror insurance products are bound to be upgraded and the rate of premium
might change depending upon the evolution of new products that the industry may
come up with. He further said that in view of more entities opting in the common
terror insurance pool could go up.

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STEPS

TO

CHOOSE

AN

EFFECTIVE

TERRORISM INSURANCE POLICY


Step1
Request the upper financial thresholds to provide information on the terrorist
insurance claims through a provider. Companies set a limit to individual incidents
and the maximum number of pay outs over the life of your policy. You should opt
for a plan with higher individual pay outs unless you work in a high-risk
environment.
Step2
Determine the monthly premiums offered by a potential provider. Higher
premiums do not necessarily mean greater insurance pay outs for incidents. Your
company needs to balance out your deductible, premiums and other financial
information to avoid paying out excessive money for a terrorism insurance policy.
Step3
Locate an insurance provider that specializes in risk management and terrorist
insurance. There are only a few of these companies worldwide but their
international holdings allow them to protect your business assets without charging
exorbitant premiums.

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TERRORISM RISK IN INSURANCE SECTOR


Step4
Research should be done through online reviews and trade publications to
determine the reputation of an insurance provider. Providers with a strong
reputation for service and a portfolio of significant corporate clients are ideal when
protecting your company.
Step5
Read through all materials made available by an insurance company to find
specific definitions of terrorism and coverage of such acts. A provider that claims
to protect your business against biological and chemical attacks must have these
protections spelled out to avoid confusion if an insurance claim is filed.
Step6
Learn about potentially drastic changes in terrorism risk insurance before you
select a policy. The United States Congress has been debating the renewal of the
Terrorism Risk Insurance Act (TRIA) which dictates terrorism risk insurance
policy throughout the country. Insurance providers like Marsh offer regular reports
on the potential effects of TRIA to policy holders.

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CONCLUSION
Terrorism is a new risk posing challenge for the insurance industry.
Insurance is envisaged as a way of spreading risk and reducing the likelihood and
potential losses from an untoward event. This turn tenders social and economic
continuity to the country in the event of a national catastrophe.
Following the incidents of September 11, private insurance firms suspended
their terrorism insurance coverage and request for government intervention in the
terrorism insurance market. Today, there is a need for a public-private partnership
to address this issue with well-defined respective roles in crafting and refining the
risk management facilities and systems. The government must carry on to be a
valued partner to the insurance industry and this would allow public universal
business interests to persist with confidence regardless of the impulsive and
catastrophic nature of terrorism risks.
The need of the hour is new financial tools for handling large-scale risks.
Tools such as catastrophe bonds, options, and other instruments to help hedge and
spread the risks of natural disasters are already available. Similar tools are likely to
be useful in the terrorism insurance market also.
Once better tools for assessing terrorism risks and new risk management
instruments to spread and manage them are available, the insurance industry the
world over would definitely assume a greater role in insuring against terrorist
attacks. Terrorism insurance definitely provides a measure of certainty in an
uncertain and perilous world.

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Bibliography
Websites:

www. IRDA.org.com

www.TRIA.org.com

www.TRIEA.org.com

www.TRIREA.org.com

www.wekipedia.com
Books:

Insurance Chronicle Magazine


(January & February edition)

Articles from Economic Times

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