October 2013
EVOLVING TERRORISM RISK
Introduction
Before 2001, terrorism attacks were generally small and unrelated occurrences, which insurance companies were able to cover – for
example, in the UK (Irish Republican Army), Spain (Basque separatist movement) and Sri Lanka (Tamil Tigers). Insurance coverage
for losses from such attacks was normally included in general insurance policies without specific cost to the policyholders.
Terrorism in the West took a sharply different turn on September 11, 2001 when four aircraft were hijacked by Al-Qaeda
operatives, with three hitting their targets, two of which were the World Trade Centre in New York City.
The impact of the terrorist attack that day rocked the insurance industry, with insured losses of about $32.5 billion, or $42.1
billion in 2012 dollars. It also caused the US Government to enact a Terrorism Risk Insurance Act (TRIA), which was always
meant to be a temporary measure.
However, TRIA has been reauthorized twice and is now set to expire on December 31, 2014. If TRIA is not reauthorized, the
number of property insurers willing to continue offering terrorism insurance in the US is likely to decrease, experts say. As Willis
remarks, “Uncertainty regarding the fate of the current federal terrorism backstop . . . is creating challenges for risks with
concentration exposures. Carriers are walking away from excellent accounts forcing employers to use state Workers’
Compensation funds for coverage.”
Terrorism Capacity Increases
Guy Carpenter estimated last year that there is approximately US$2.5 billion of capacity for terrorism and sabotage coverage in
the facultative reinsurance market. “As loss activity increases and pricing subsequently rises, capacity is attracted to the
territory. Nevertheless, the recent increase in loss frequency in the facultative market has not yet affected the general market
and we do not currently anticipate general market hardening. We instead have seen changes to capacity and pricing at the
local level” Guy Carpenter said in its report.1
In October, Willis calculates that the terrorism capacity has risen to US$3 billion because of new entrants into the stand-alone
terrorism insurance.2 Captives continue to provide access to otherwise unavailable capacity, including coverage for nuclear,
1
2
Guy Carpenter (2012) Tensions building: The changing nature of terrorism risk and coverage. December, p.11. Willis (2013) Marketplace realities: Innovation and continuity. October, p.25 EVOLVING TERRORISM RISK By Indrani Nadarajah
ADVANTAGE MONTHLY: emerging trends and issues. The CIP Society. October 2013
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biological, chemical, radiological and cyber terrorism. However, captives may be vulnerable to changes in the TRIPRA backstop
after 2014, Willis noted. It expects renewal increases to range between 10%-25%.
Three Types of Political Risk Insurance
There are three main types of coverage that companies that may have to grapple with political unrest could consider: Strikes,
Riots and Civil Commotions (SRCC) insurance, Terrorism cover (also known as the Lloyd’s Sabotage & Terrorism Only Form) and
full Political Violence cover.
The standard terrorism insurance policy, known as LMA 3030, has a base wording that covers physical loss or damage resulting
from an act of terrorism.
The LMA defines an Act of Terrorism as:
“An act (including the use of force or violence) by a person or group committed for political, religious or ideological purposes
with the primary intention to influence any government. They may be either acting alone or in connection with any
organization.”
Willis has argued that such a definition of terrorism is too narrow, and throws itself open to interpretation. “It is this
requirement that the terrorist act must influence or overthrow the government that can cause a potential gap in coverage.
Other restrictions include the requirement to rebuild or reinstate after damage and the policies are usually cancellable.”3 This is
because increasingly, terrorist attacks are being committed against private sector interests.
In fact, the latest terrorist attack, in Kenya, was at a Westgate shopping mall owned by an Australian-Israeli businessman,
Frank Lowy.
The changing nature of terrorism
The most significant attacks for reinsurers post-September 11, 2001, were the Madrid train bombings of 2004, the London
transport network attacks in 2005 and the Mumbai bomb attack of 2008.4
More than 2,400 macro attacks have occurred worldwide since 2001, killing over 37,000 people and injuring nearly 70,000. The
majority of the victims have been in Afghanistan and Iraq.5 According to RMS, 92% of the macro attacks were linked to religious
terrorism.6
A 2012 report from the U.S. Department of State also highlighted the evolving nature of terrorism. There were more than
10,000 terrorist attacks in 70 countries in 2011, causing more than 12,500 deaths.7 More than 75% of the world’s attacks
occurred in South Asia and the Near East, and 85% of attacks in these regions occurred in Afghanistan, Iraq and Pakistan.
3
Willis Client Alert (2011) Political risk insurance: Mind the gap (April). Retrieved from http://www.willis.com/Documents/Publications/Services/Political_Risk/Willis_Political_Risk_Report_April_2011.pdf, p.5 4
Guy Carpenter (2012) Tensions Building: The changing nature of terrorism risk and coverage. December. 5
Risk Management Solutions Inc (2011). Terrorism risk in the post 9‐11 era. A 10‐year retrospective. Retrieved from https://support.rms.com/publications/9_11_Retrospective.pdf 6
Ibid., p.4 EVOLVING TERRORISM RISK By Indrani Nadarajah
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U.K. risk consultancy Maplecroft also identifies an increasing trend for terrorism across some of the most promising growth
economies that could put additional pressure on corporate interests. In January 2013, Maplecroft classified Nigeria, the
Philippines, Colombia, Thailand, India and Russia among 18 countries labouring under the “extreme risk” label. While the
potential economic gains from operating in these countries is still high enough to attract investors, the steps required to
mitigate such threats to employees, assets and supply chains is definitely increasing the costs for business, including for
insurance, Maplecroft cautioned.8
The Arab Spring
The wave of Arab Spring demonstrations that swept across several countries in the Middle East and North Africa over the last
two years has resulted in a change of government in Tunisia, Egypt, Yemen and Libya and an ongoing bloody civil war in Syria.
These countries remain deeply unstable. On September 11, 2012, the U.S. Ambassador Chris Stevens, along with three other
U.S. officials were killed in an attack on the U.S. consulate.
There are also concerns that radical Islamic militants are attempting to exploit the ongoing civil war in Syria to gain support
within the country, while capitalizing on the unrest to provoke a cross-broader sectarian conflict in the region.
Al-Qaeda
Over the past few years, al-Qaeda has expanded its reach by offering support and training to groups and individuals, to carry
out attacks in countries like Afghanistan, India, Indonesia, Iraq, North Africa, Pakistan, Saudi Arabia, Spain, the United Kingdom
and Yemen.
Pre-September 11, 2001, Al-Qaeda had a well-funded and centralized organization. However, it suffered a massive setback
when U.S. forces killed Osama bin Laden in Pakistan in May 2011. This, along with the deaths of several other senior al-Qaeda
figures in Pakistani drone strike attacks, has weakened it considerably. Nonetheless, al-Qaeda’s ideology and threat remain,
and its aspiration to carry out large-scale attacks against Western interests has been reinforced by the current leadership of
Ayman al-Zawahiri, an Egyptian.9
Intelligence agencies now believe some al-Qaeda affiliates have eclipsed the core group as the most imminent threat to the
Western world. These groups typically operate with a large degree of autonomy. For example, Al-Qaeda in the Arabian
Peninsula (AQAP) in Yemen and al-Shabab in Somalia are among the most dangerous al-Qaeda affiliates today.10
Kenya’s Westgate Mall Attack
Al-Shabab is the most prominent insurgent group in Somalia and is known to have successfully recruited American and
European adherents. The group also claimed responsibility for the attack on a Nairobi Shopping Mall, the Westgate Mall, killing
at least 67 people, in September. This was the second major terror attack to hit Kenya after the 1998 bombing of the US
embassy in Nairobi’s central business district.
7
U.S. Department of State (2012) Country Reports on Terrorism 2011. July 31. Maplcroft Global Risk Analytics (2013) Political risk atlas 2013. Retrieved from http://maplecroft.com/about/news/pra_2013.html 9
BBC News (2013) Al‐Qaeda’s remaining leaders. Retrieved from http://www.bbc.co.uk/news/world‐south‐asia‐11489337 10
Guy Carpenter, p.5. 8
EVOLVING TERRORISM RISK By Indrani Nadarajah
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Insurance experts estimate that the mall attack is expected to cost up to US$76 million.11
Terrorism and political risk covers are a fairly new idea in the Kenyan market with minimal uptake.12 Abel Munda, the
managing director of Kenyan insurer CFC Life, says insurance against acts of terror has not been new into the country, only that
the uptake has been muted. “We have traditionally had insurance cover against acts of terrorism in the industry which is often
under political risk,” he explained.
“However, many firms have not been taking this up because of the view that risks such as terrorism and political violence
appear low in Kenya.”13
This perception might change -- Al Shabaab has since warned that the attacks will not abate. Tweets have been posted
warning that the next attack would be through chemical weapons targeting such sensitive public facilities such as water
sources and collection points.14
Canada’s vulnerability
Terrorist acts in Canada are determined by the Criminal Code. The code defines terrorist activity to include “an act or omission
undertaken, inside or outside Canada, for a political, religious or ideological purpose that is intended to intimidate the public
with respect to its security, including its economic security, or to compel a person, government or organization (whether inside
or outside Canada) from doing or refraining from doing any act, and that intentionally causes one of a number of specified
forms of serious harm.”
Unlike the US, Canada does not have compulsory terrorism insurance, but the country is not immune to terrorist attacks,
especially from homegrown terrorists, nor is it immune from exporting terrorists.15
In April 2013, there was an arrest of two individuals for allegedly plotting to attack a ViaRail passenger train running between
Toronto and New York City. Late September, it was reported that the two men would be proceeding straight to trial.
Canadian authorities are also investigating a report that a 24-year-old Ontario man was one of the Al-Shabab gunmen who
stormed the Westgate shopping mall.16
11
Okpamen, O. (2013) UK insurer faces $75.9m bill For Westgate damages. Ventures Africa, Sept 27. Retriever from http://www.ventures‐africa.com/2013/09/uk‐insurer‐faces‐75‐9m‐compensation‐bill‐westgate‐damages/ 12
Okulo, L. (2013) Kenya: insurance bills headache after Westgate attack. The Star, Sept 26. Retrieved from http://allafrica.com/stories/201309270818.html 13
Standard Digital (2013) Westgate attack exposes firms to higher premium bill. Sept 27. Retrieved from http://www.standardmedia.co.ke/?articleID=2000094442&story_title=westgate‐attack‐exposes‐firms‐to‐higher‐premium‐
bill/business 14
Standard Digital (2013), Terrorism: why Kenyans should be afraid but alert. October 12. Retrieved from http://www.standardmedia.co.ke/?articleID=2000095415&story_title=terrorism‐why‐kenyans‐should‐be‐afraid‐but‐alert 15
Dehass, J. (2010) Insurance orange alert. Macleans. December 16. Retrieved from http://www2.macleans.ca/2010/12/16/insurance‐orange‐alert/ 16
Bell, S. (2013). Canada investigating report 24‐year‐old Ontario man among militants in deadly Kenya mall siege, Financial Post. Retrieved from http://news.nationalpost.com/2013/09/22/terror‐group‐behind‐kenya‐mall‐siege‐says‐canadian‐man‐is‐
one‐of‐their‐gunmen/ EVOLVING TERRORISM RISK By Indrani Nadarajah
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Canada Needs National Strategy
According to the 2013 Public Report on the Terrorist Threat to Canada, Canada features prominently on Al-Qaeda’s list of terrorist
targets.17
This country sorely needs a national strategy to properly respond to terrorists and cyber-attacks, stress experts. According to a
report by the MacDonald Laurier Institute, there is currently a lack of information sharing between jurisdictions. There is also no
comprehensive national strategy to protect critical infrastructure (CI).
Most of Canada's essential systems like oil and gas pipelines, nuclear facilities, hydro lines, telecommunications, emergency
response, medical services, are at potential risk of a terrorist attack. This does not include banking systems and private
industries.
“This central national security issue is dependent on a weak, incoherent federal ‘framework document’ developed by Public
Safety Canada meant to guide a plethora of conflicting authorities if they decided to produce CI security policies,” says Douglas
Bland, one of the study’s authors and a Queen’s Defence Research Fellow. “There is no reliable mechanism to hold anyone to
account for any decisions regarding Canada’s CI security because no one is accountable for Canada’s national CI security.”18
Cyber-terrorists
But the terrorist threat is becoming quite amorphous, especially when it occurs in the cyber-sphere. In 2010, hackers using
servers based in China breached sectors within three federal departments.19 In 2011, Public Safety Minister Vic Toews publicly
said that every day, individuals, groups and state-sponsored agencies attempt to break in to government and private sector
systems. Toews called it a serious threat, adding that attacks on government computers have grown “quite substantial.”20 This
year, it was reported that Canada feared it could become overwhelmed by cyber-terrorist attacks.21
Canada is hardly alone – earlier this year, the U.K. reported it faces about 33,000 cyber-attacks a month22, while a group of
“highly sophisticated” hacker mercenaries has been discovered operating out of China. This group has been dubbed “Hidden
Lynx”.23 It is believed to have been operating since 2009.
The Stuxnet virus was used by the U.S. and Israel to disable Iran’s nuclear enrichment facilities.24 “It appears to be the first time
the United States has repeatedly used cyberweapons to cripple another country’s infrastructure, achieving, with computer
17
Canada (2013) Public report on the terrorist threat to Canada. Retrieved from http://www.publicsafety.gc.ca/cnt/rsrcs/pblctns/trrrst‐thrt‐cnd/index‐eng.aspx 18
Queen’s University (2012). Canada lacks national strategy to respond to terrorists, natural disasters and cyber‐attacks. Sept 3. Retrieved from http://www.queensu.ca/news/articles/canada‐lacks‐national‐strategy‐respond‐terrorists‐natural‐disasters‐and‐
cyber‐attacks 19
Hale, J. (2013). Canada infrastructure vulnerable to cyber attack, RCMP report. January 16. SC Magazine. Retrieved from http://www.scmagazine.com/canada‐infrastructure‐vulnerable‐to‐cyber‐attack‐rcmp‐report/article/276376/ 20
Harris, K (2013). Threat of cyber attacks on Canada on the rise: Experts, QMI Agency. Retrieved from http://www.torontosun.com/news/canada/2011/01/28/17077451.html 21
De Souza, M (2013). Cyber threats could overwhelm Canada within two years: CSIS. February 11. PostMedia News. Retrieved from http://o.canada.com/news/national/cyber‐threats‐could‐overwhelm‐canada‐within‐two‐years‐csis/ 22
Hodge, K (2013). Govt faces around 33,000 cyber attacks a month. The Independent, April 23. 23
Finkle, J. (2013) Hacker group in China linked to big cyber attacks. Reuters, Sept 17. EVOLVING TERRORISM RISK By Indrani Nadarajah
ADVANTAGE MONTHLY: emerging trends and issues. The CIP Society. October 2013
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code, what until then could be accomplished only by bombing a country or sending in agents to plant explosives,” a New York
Times article reported.
Evolving domestic terrorism threat
Homegrown Terrorist Threat: Catastrophe modeller RMS cites the bombing of the Boston Marathon in April this year as a
“strong reminder” of the homegrown terrorism threat in the West. Increasingly, the terrorist threat will come from domestic
extremists.
In a research brief, the Rand Corporation also reports that a growing movement of “domestic radicalism” has emerged,
motivated by anti-globalization. Three homegrown entities which have demonstrated proclivities for civilian-directed violence
are:

Anarchists, who believe that international trade and commerce is a mask that hides U.S. interests;

Far-right extremists, who say globalization is an American-led conspiracy by and for the benefit of Jewish capitalists;

Radical environmentalists, who say corporate power and capitalism is the single greatest threat to the environment.
A notable common thread in many of the trends is an increased risk for the private sector. RMS singles out hotels as particularly
vulnerable, along with Jewish and Christian targets, including places of worship.25
Resource Nationalism
Resource nationalism is also beginning to gather force as another emerging domestic terrorism threat. This is a trend that is
increasingly affecting Canadian miners as they do business overseas.
Canadian miner Gabriel Resources, operating in Romania, is discovering to its chagrin that it might have to relinquish control
over its proposed development of the Rosia Montana gold mine’s develop in Romania. Gabriel Resources has threatened legal
action if the agreement is nullified. The project, which was to be one of Europe's biggest gold mines, has faced local opposition
over its planned use of cyanide.26 A parliamentary decision was expected around Nov. 1, but this has now been delayed to
November 10. 27
24
Sanger, D. (2012) Obama order sped up wave of cyberattacks against Iran. June 1. The New York Times. Retrieved from http://www.nytimes.com/2012/06/01/world/middleeast/obama‐ordered‐wave‐of‐cyberattacks‐against‐
iran.html?pagewanted=all&_r=0 25
Rand Corporation (2005)Terrorism insurance and the evolving terrorism insurance. Retrieved from http://www.rand.org/pubs/research_briefs/RB9129/index1.html; See also Risk Management Solutions, p.5 26
Canadian Press (2013). Gabriel Resources says Romania has ordered further study of Rosia Montana mine. September 18. Retrieved from http://www.timescolonist.com/business/gabriel‐resources‐says‐romania‐has‐ordered‐further‐study‐of‐rosia‐montana‐mine‐
1.628864 27
Gabriel Resources Press Release (2013): Rosia Montana – Special committee of parliament report timing extended. October 23. EVOLVING TERRORISM RISK By Indrani Nadarajah
ADVANTAGE MONTHLY: emerging trends and issues. The CIP Society. October 2013
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Since 2011, Zimbabwe has also been threatening to seize ownership of foreign mines, which could affect the assets of the
Canadian miner, Caledonia Mining. The country is drafting a new amendment which does not include compensation for
overseas miners.28
Last year, Bolivia revoked the mining licence of Vancouver-based South American Silver Corp., expropriating its Malku Kholta
silver mine.29
Conclusion
Almost half or 44% of the countries that were measured in Aon’s 2013 Terrorism and Political Violence Map showed an
“identifiable risk of terrorist attacks.” There is no question that “the global economic crisis, shifting geopolitical balances and
two years of unusually high levels of civil upheaval present challenges and opportunities for businesses looking to expand,”
Henry Wilkinson, head of the intelligence and analysis practice at Aon’s Risk Advisory, said.
The uncertainty and power vacuum created in some countries has produced significant opportunities for extremists groups and
governments that sponsor terrorism. Unfortunately, the instability is ongoing. Many grievances used by extremists to recruit
militants remain unresolved. Unrest is rife not just in the Middle East, but also in Europe. Widespread protests in countries like
Greece and Spain against severe austerity budgets and high youth unemployment have resulted in violence. It has also led to
the rise of a neo-Nazi political party in Greece, called Golden Dawn which recently had its wings clipped after the killing of a
left-wing musician.
-END© CIP SOCIETY, October 2013.
28
Wild, F. (2013). Zimbabwe to Seize Mines While Compensating Banks. Bloomberg News. Aug 6. Retrieved from http://www.bloomberg.com/news/2013‐08‐06/zimbabwe‐to‐seize‐mines‐while‐compensating‐banks‐ministe.html 29
Jordan, P. (2012). In Latin America, nationalism stumps Canadian mining companies. Globe and Mail. July 11. Retrieved from http://www.theglobeandmail.com/report‐on‐business/international‐business/latin‐american‐business/in‐latin‐america‐
nationalism‐stumps‐canadian‐mining‐companies/article4405034/ © ADVANTAGE MONTHLY: emerging trends and issues. The CIP Society. October 2013.