Risk - The building blocks of US risk management.

(From Reinsurance)

The risks inherent in the built environment have traditionally been assessed and priced by the (re)insurance sector while public regulation has taken the control of the acceptable risk levels in the physical environment.

However, the process of understanding and managing terrorism risk requires a new process to develop the physical and operational solutions.

Terrorism risk is essentially new in the US and the threat is not well defined. The (re)insurance industry therefore has a challenge in meeting this threat and the traditional means of analysis are not proving effective as a basis for pricing the risk. The lack of experience also means it is hard for potential buyers to assess their insurance needs while those selling the cover need a defensible basis for the way they price the insurance.

The attacks on the World Trade Centre (WTC) graphically illustrated the terrorism risk for property and liability insurers. The losses came under various categories: property losses to the WTC and surrounding buildings; business income loss and rent loss; workers' compensation, life and health insurance for victims and tenants; liability losses for inadequate fire prevention and evacuation procedures; and financial losses associated with mortgage notes of lenders and investors.

The property and liability coverage is principally claimed by the building owner and as the aftermath of the WTC disaster has proven, the extent of the claim can be complex. Whether the building is to be rebuilt is an issue but the characterisation of the incident is also a factor. Most property policies are written on an occurrence basis and so the definition of what a terrorist incident is, is of critical importance in terms of what is covered and what is excluded. Due to the newness of these issues in the US there is a lack of interpretation by the courts.

Business interruption insurance presents a special set of problems. Loss of income policies, which have usually come under the standard fire policy, are written either for a specific time period of for actual loss sustained, but when the losses are on the scale of the WTC disaster it goes way beyond the scope of these policies. Problems also arise because of adjacent buildings.