Insurers Need To Take Steps

Against Terrorist Risks: LOMA

By

Life and health insurers face the distinct possibility of financial disaster if there are widespread terrorist attacks, warns a new study from LOMA, Atlanta.

And whether insurers realize it or not, they are underwriting these risks, says Steven Forbes, author of the LOMA report, “The New World of Risk.”

“There are no exclusions in life insurance contracts for nuclear or biological events, so they are underwriting them,” Forbes notes in an interview with National Underwriter.

LOMAs study also points to a number of more conventional threats for the industry, including hacker attacks on computer systems and escalating tort litigation. But it is the terrorist threats that lie outside the life insurance industrys normal frame of reference, and for which LOMA warns many in the business may be unprepared.

The 9-11 attacks took about 3,000 lives. That was horrific in human terms but one that the life and health insurance industry was able to absorb with relatively little trouble.

However, LOMAs report points to some potential terrorism scenarios involving the loss of perhaps hundreds of thousands of lives plus numerous serious injuries. That would be an overwhelming economic and financial disaster for all industries, including insurance.

In its report, LOMA urges industry executives to change their assumptions about the world to account for these new threats.

Among the scenarios discussed in the LOMA report is the possibility of a nuclear explosion in a major metropolitan area, such as Manhattan, a series of dirty bombs (conventional explosives laced with deadly radioactivity) set off in large cities or a biological attack in which virulent bacteria or viruses are introduced to the U.S. population.

The life and health insurance industry may be underestimating the losses that would occur from a successful biological attack in the U.S. involving a contagious agent such as smallpox, the study warns. (In contrast, a successful chemical attack would probably cause no more than a few hundred deaths and injuries, LOMA concludes.)

The government cannot take over insuring such catastrophic risks, and it is probably not going to try, Forbes warns.

Moreover, he adds, the insurance industry would be hard put to set aside reserves to cover terrorist catastrophes because it has no data on the exposure.

One of the steps he advises the industry to take is to spread the risk as much as possible. Carriers should avoid concentrating their business in limited geographic areas, for example, by dispersing their insurance sales, and thus their mortality risk, over broad regions.

Similarly, carriers can assure that the physical location of backup facilities for their computer systems are located far away from their main office, to maximize the chances of retaining customer and other data in the event of a catastrophe.

As for germ warfare, LOMA suggests carriers help clients to take reasonable precautions to deter the effects of a biological attack. For instance, they can encourage corporate customers to install air-filtration systems in their office buildings, which would clear the air of bacteria and viruses that might be part of a bioterrorist attack.


Reproduced from National Underwriter Edition, April 9, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.