Terrorist Threat Blog

by Antiterrorism Consulting

 08 / 23 / 2014

 

The defense against a "terrorist attack" is only a cost, or can it may also have an economic return?  

 

 

The term 'terrorism' refers to intentional acts, criminal or malicious. There is no universal definition of terrorism. Officially, terrorism is defined in the Code of Federal Regulations as "... the unlawful use of force and violence against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in support of political or social objectives" (28 CFR Section 0.85). The terrorist threat can also characterizes like a national or international, depending on its origin. However, the source of the terrorist threat is irrelevance for this article. 

The industrial activities, whether they are classified as Critical Infrastructure or "reality at high risk of terrorist attack", are unprepared to handle the terrorist threat, both in terms of physical security and management.

After the attacks of 9/11 to WTC (World Trade Center), 2004 to Madrid and 2005 to London, several countries in the world have enacted legislation regarding obligation to adopt of systems able to prevent or delay an terrorist attack to strutture. United States approved legislation 6 CFR Part 27, in Europe approved legislation 2008/114/EC and the Russian Federation approved numerous regulations in this regard.

Because all of these regulations require investment from managers / owners of assets under "risk of terrorist attack", an obvious question arise: can we have an economic return from implementing a defense against terrorist risk, or those laws are always a cost to industrial activity without economic return? All the investments that are made, are designed to generate an economic return, then see an economic return in anti terrorism defense that may seem impossible, unless you operate in countries with very high risk of terrorist attacks.

This article will attempt to explain that the implementation of a defense against the terrorist threat, is not only a cost, but it falls into the category of investments that generate an economic return, other than that which can generate a new plant. 

Protecting your business and / or assets from terrorist threats would greatly affect two factors that are very important nowadays for a productive activity: 

  • Insurance Sector 
  • Financial Sector 

These factors do not seem to be connected with each other, but live together closely. To better understand how these factors are influenced by effective protection will be analyzed in detail.

 

Insurance Sector 

In today's society, insurance companies play an important role in risk management, as they provide a breakdown of the risk itself, allowing people to accept the risks that would otherwise be unacceptable. Obviously the price of insurance is based on a set of data that identifies the risks to which a structure is subjected and which mitigation measures are required to reduce their risk. On this basis, the "terrorism risk" is a new concept and not well defined, because there are no current data and the experience is very limited.

The demand for insurance coverage for the "terrorism risk," provides coverage for a catastrophic loss of value of the property, and then the insurance premium should be assessed according to the exposure of the asset to the threat, the interest that a likely group terrorist can have in attacking the industrial activity and what impact on social structure it can have. 

In light of this, it is clear that some variables may undergo a rise or decrease, depending on how risk is managed. Some insurance products, that cover the "terrorism risk", may have a direct or indirect relationship with the security of the structure. Some terrorist threats may have some relationship with some insurance coverage: 

  • Property 
  • Interruption in production 
  • Insurance on workers 
  • Safety
  • Dead

Several terrorist attacks may result in losses, which are covered in several lines of insurance. Other terrorist attacks, however, may result in losses that are not covered by some insurance, because it doesn't produce physical damage to the property.

In addition to "material damage", there are other insurance clauses that are closely linked to the performance of the industrial activity, and are of direct interest to owners and managers. The insurance on interruption of activity, which covers the business income lost, presents particular problems for insurers, owners, and lenders in the event of a terrorist attack. The policy on the loss of income (generally within a standard policy) is written by insurers for a specified period of time or on the basis of "an actual loss sustained", and requires that insurers and owners or tenants are agree on actual losses.

Usually the loss of productivity is insurable, if the building is damaged by an insurable hazardous. Not all hazards are insurable. In the case of the terrorist attack of 9/11 to WTC, several adjacent buildings were evacuated by order of civil authority. The evacuation in response to the civil authority may be excluded from the coverage of a risk, even for a limited period of time. To deny access to the building without physical damage to the structure, as in the case of a CBR terrorist attack is currently excluded from insurance coverage, for some policies. Therefore, a terrorist attack with a CBR release without physical damage, but with only a contamination of the facility, would result in the unavailability of the same structure for a long time, and the damage associated (interruption in production, decontamination) may not be covered by the insurance policy.

After the terrorist attacks of 9/11, the DoS - Department of State of United States - enacted the Terrorism Risk Insurance Act of 2002 (TRIA), which regulates the insurance on the "risk of terrorism". According to this document, so that activity can be compensated against damage caused by a terrorist attack, the malicious act must be certified as terrorist attack by the government, and it must have these characteristics:

  • Must be a violent act or an dangerous act on human life, property or infrastructure.
  • Must have caused damage.
  • It must have been committed by someone that wants influence the policy or affect the conduct of government by coercion or using the force against the civilian population.

Note that this definition excludes hazards like contaminants such as chemical, biological, radiological.

 

Financial Sector 

The Finance, like banks and financial resources, provide the financial resource for investment to owners and managers of infrastructure and industrial activities.

The financial sector is concerned about the adequacy of insurance coverage on the property and the protection of the structure itself for a potential loss of good and therefore the default of the debtor. Insurance on employees, and on liability and on business interruption are indicators of salvation or default of a debtor. 

Credit and solvency are now threatened by the terrorist threat ; a proper asset protection and adequate insurance cover has an impact on the asset value and the financial health of the borrower.

The potential impact of terrorist attack on a structure, it affects the financial sector in 3 points: 

Loss of activity: The approach to this risk is to purchase adequate insurance coverage for all relevant risks, and to ensure an adequate defense of the good, in order to ensure that no may be lost due to external causes. "Terrorism risk" includes modes of attack that can be classified into two main types: 

  • attacks that directly damage the building, 
  • attacks that do not physically harm the building, like a CBR release

Some terrorist attacks may not be covered by insurance policies, therefore, these pose a risk to the lenders, because they can affect the value of the property. To better understand the problem you think of a contamination of a well. The cost of decontamination (if not covered for insurance) can cost more than the asset value of the asset. 

Default of the debtor: The protection of the industrial activity is of fundamental importance for the maintenance the solvency of the borrower, as well as providing a guarantee for the loan. A denial access to activity or interruption of production for a long time, can lead to a default of the debtor, resulting in loss of credit by the financial institution. 

Cost of capital: an investment resulting risky, because it is exposed to terrorist threat, it can become very expensive, as it will be present in a rise in interest rates and less access to finance itself.

 

In light of these considerations, we can answer the question posed at the beginning: "a defense of industrial activity from terrorist threats is only a cost, or has it an economic return?"  You can deduct the cost that an operator of a industrial activity or CI (Critical Infrastructure) must face in order to reduce its exposure and vulnerability to the terrorist threat, it will bring an economic return different from what you usually think. The adoption of a AntiTerrorism Management System - ATMS  (Physical Security, Standards, Procedures, Business Continuity Plans, Design Basis Threat) can leverage on the insurance and financial industries. 

The financial sector will consider the investment safer and more secure than another of the same type but without the same guarantees, while the insurance will be more inclined or to cover risks not covered before in the policy (eg. contamination) or lowering the insurance premium or increasing the total amount of damage coverage. 

You have to take this important aspect:  a successful terrorist attack carried out against a structure, may cause damage in order from hundreds to thousands of millions of euros, for example: 

September 11, 2001: $ 84,000,000,000 

March 11, 2004 - Madrid: $ 269,000,000 

July 7, 2005 - London: $ 2,540,000,000 

Obviously a structure protected by "terrorism risk" is also protected from the other risks like theft, sabotage, espionage etc ..., so the benefits of doing so are many, in addition to those that were sought to explain in this article.

 

 

by - Antiterrorism Consulting ®