The evolving nature of terrorism presents constant challenges for insurers looking to provide adequate coverage in an expanding market. Stephen Ashwell offers an update on terrorism risk today.

It's September at the time of writing and the spotlight on providers of terrorism insurance could not be stronger. Questions around the longevity of TRIA, the heightened security measures following the foiled London aircraft bomb plot and the ongoing crisis in the Middle East underline the unpredictability of the business.

Then, of course, there is the fifth anniversary of 11 September 2001. This date marks a significant moment in modern times, a single event that caused a shift in the underwriting approach to terrorism; property underwriters around the world imposed a blanket exclusion to remove terrorism from their fire perils policies giving rise to several alternatives attempting to fill this gap.

Terror alternatives

In the time immediately following the attacks on the World Trade Center in New York, governments in the western world came under pressure to provide a natural disasters fund and borrowed the blueprints of existing schemes like Pool Re in the UK and Concorcio in Spain.

In the US, the Terrorism Risk Insurance Act (TRIA) of 2002, recently extended to 2007, provides a financial backstop for commercial insurers. In Europe, many countries developed their own arrangements, with Austria, Germany, France and The Netherlands (to name a few) introducing their own programmes. Today terrorism insurance is more widely offered - as the threat of attacks continues to increase and the War on Terror shows no signs of abating - and is usually dependent on the location of a risk in any one particular country.

Keeping up-to-speed on terrorism threat levels around the world is obviously vital in order to be able to adequately assess risks in any one given place. Clients can have a wide range of conflicting issues and the underwriting criteria can be varied. Also, when assessing risk, the political and economic issues affecting many countries may have an influence on their profile. Equally, tracking exposure in any one area is also important and brokers need to take a strict approach to monitoring the aggregation of metropolitan exposures. Needless to say, risk assessment is mostly conducted on the ground and the average broker might spend about two to three months of the year travelling to countries that they are considering risks for. It is also valuable to have a close working relationship with global security consultants such as the Control Risks Group. Working with security specialists in different countries within a dedicated organisation such as this allows companies to acquire detailed analysis and up-to-date information relating to their risks and those of potential clients.

Clearly, before an institution can make an informed decision about the transfer of risk with an insurance solution, it needs to understand the factors that can have an impact on its business and should seek to understand the threat levels that exist and their vulnerability to the same.

At a time when the subject matter of terrorism continues to evolve, clients will benefit from the combined approach of insurance expertise backed up with independent consultancy advice.

Current key trends in terrorism

Regional and domestic conflicts push up numbers - The statistical analysis of terrorist incidents shows that, while terrorist incidents overall rose more than threefold from 2004 to 2005, this rise was driven by an increase in domestic attacks in the Middle East (especially Iraq) and Asia.

Soft targets, lethality increasing - Terrorists increasingly attack soft targets, such as public transport systems and hotels and bars where tourists congregate. This means that the average lethality of attacks is increasing. Targeting civilians is effective because it not only creates a sense of fear, but it also has tremendous economic impact.

Home-grown cells - The July 2005 London bombings and subsequent foiled plans in the UK highlighted a new breed of domestic terrorists in Europe and point to the more general trend for decentralised, autonomous terrorist cells. These groups are able to function with less money and fewer logistical problems. The existence of these groups opens up the number of possibilities for targeting and makes prevention a lot more complicated.

Suicide bombings - Suicide bombings by individuals on foot are the most feared among potential methods of attack because they can involve the perpetrator entering a crowded location. The US recorded 360 suicide bombings worldwide in 2005, which were responsible for around 3,000 fatalities.

- Stephen Ashwell is lead underwriter of war and terrorism risks at Hiscox.

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Terrorism - The nature of terrorism today

On 5 September the US government released an update of the national strategy for combating terrorism, shortly before the fifth anniversary of the 9/11 terrorist attacks. Days after the report was released, Osama bin Laden hit the headlines with the release of a video showing himself with those involved in the attacks, timed to show the world that the War on Terror is not only far from over but is, in fact, failing.

Al-Qaeda's most enduring impact since 2001 has been to instil other groups with a sense of duty to fight both local enemies and the US. Although al-Qaeda no longer has clear control over emerging terrorist networks, and many question its ability to conduct and coordinate further attacks on the scale of September 2001, it can still inspire, instigate and coordinate operations by others. Groups within its ideological orbit now emulate al-Qaeda, adopting the vision and the mission of a universal jihad.

The situation is not as bleak as many would have forecast in the immediate aftermath of the September 11 attacks. In absolute terms, the number of terrorist attacks outside Iraq and South Asia has fallen or levelled off since September 2001. There has not been another terrorist attack on the same scale as September 11, and al-Qaeda has not been successful in toppling governments in the Middle East and Asia as it had hoped. Western forces have not left the Middle East and the government of Saudi Arabia still stands. Numerous plots have been thwarted, such as in Denmark, Germany and Canada. This reflects several successful counter-terrorism measures. The war in Afghanistan toppled the Taliban in 2001, denied al-Qaeda training bases and neutralised some of its leadership, while intelligence reform has improved understanding of the jihadist threat. There is also better information-sharing between nations.

The perception of the terrorist threat greatly exaggerates the reality, and it is this perception and sense of fear that Islamic extremist organisations such as al-Qaeda seek to exploit to achieve their longer-term aims. Fears have been heightened by numerous high-impact, mass casualty terrorist attacks, including Indonesia, Spain, the UK, Morocco, Turkey and Egypt. Terrorists are working to keep one step ahead of counter-terrorism measures by evolving methods of targeting and employing tactics that the authorities cannot foresee, such as carrying out cheap suicide attacks with small explosive devices or using sophisticated approaches to hide explosive devices in innocuous containers, as seen in the August aviation plot in the UK.