Terrorism Risk

Fear Takes No Holiday

When businesses are affected indirectly by a terrorist attack, their losses can fall through the many cracks that exist in terrorism insurance policies.
By: | September 20, 2016 • 12 min read

In April 2013, an explosion rocked the street in front of the Charlesmark Hotel, a boutique property on Boylston Street in Boston that overlooked the finish line of the Boston marathon. In the chaos that ensued, the FBI closed a 12-block radius around the blast scene. Five hotels were completely locked down, including the Charlesmark, Mandarin and Lenox hotels.

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Strictly from an insurance standpoint, the hotels, restaurants and businesses in that 12-block radius may have been the lucky ones. Direct impact to their operations would have at least given them access to insurance recovery for physical damage or for business interruption due to civil authority action, assuming they had the right coverages in place.

But what about the businesses outside that radius? No doubt their revenues suffered in the days and weeks that followed, as media coverage fanned the flames of fear, keeping Boston’s terrorism connection alive in the minds of the public.

It’s likely that few, if any of them, had language in their insurance policies that would help offset their losses while Boston struggled to regain some normalcy.

The volume of terror attacks has increased worldwide in a short period of time. At the time of this writing, three U.S. attacks with potential connections to terrorist organizations took place within a single 12-hour span on Sept. 17.

Fear has become one of the most challenging market conditions facing business that rely on travel and tourism. Gaps in coverage can take companies by surprise when high-profile events suppress travel, tourism and the general flow of commerce.

“There’s no question that the hospitality industry is affected by fear, as much or more than the event itself,” said Chad Callaghan, principal of Premises Liability Experts, based in Atlanta. Callaghan served Marriott International Inc. for 35 years, as vice president of safety and security.

Business hubs rebound more quickly, because business travelers can’t stay away for long. But companies dependent on leisure travelers for revenue can take heavy hits, depending on the nature and severity of an attack in their vicinity. It’s hard to calculate what the financial impact would be of a major attack at Disney World, or at the primary airport of the host city of the Super Bowl a week before the event.

“Terrorism is the thing that scares everybody,” said Joe Addison, executive vice president at JLT Specialty USA, “People don’t want to walk down Las Vegas Boulevard when two weeks ago there was a truck bomb there, and every time they look at a truck they’re going to worry, ‘Is there one in there?’ ”

Financial Toll

Following the November 2015 terrorist attacks in Paris, bookings at luxury hotels in the city fell by 50 percent. Within days of the Brussels terror attack, hotel occupancy plunged from 82 percent to 25 percent across the city.

Jan Schnabel, managing director and director of risk management with Hub International’s Hospitality Practice

Jan Schnabel, managing director and director of risk management with Hub International’s Hospitality Practice

“Acts of terrorism have a lingering negative impact on revenue that simply can’t be recovered,” said Jan Schnabel, managing director and director of risk management with HUB International’s hospitality practice.

“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.”

The World Travel & Tourism Council estimates that it takes a region, on average, about 13 months to get back to normal following a terrorist attack. In the grand scheme of things, that’s not long. But it can still take a mighty toll.

And booking and cancellation stats don’t really give a complete picture of what hotels may face in the immediate wake of a terrorist attack, when trying to serve the limited guests they do have.

“It’s a tough thing for risk managers to really wrap their minds around,” said Sheri Wilson, national property claims director for Lockton.

“What if I can’t get laundry? What if the roads are closed so I can’t get the people in? What if I can’t get fresh fruit in?” Hotels may need to spend a considerable amount to get the goods and services they need.

Terrorism coverage for such losses and unexpected expenses is a tricky beast. Coverage under standard property policies is typically limited to property damage and business interruption related to property damage. It also relies upon the event to be certified as an act of terrorism by the U.S. Secretary of the Treasury.

“If you elect coverage through TRIPRA, or one of the other national terrorism pools, there may be limited or no cover depending on your underlying property policy and how the terrorism ‘pool’ ultimately responds,” said Steve Truono, vice president of global risk management and insurance for Starwood Hotels & Resorts.

Business interruption (BI), or time element coverage, can be triggered by other situations such as evacuation orders, transportation interruptions or power outages. Contingent BI can come into play as well, in some cases.

“I rely on housekeeping to keep my hotel open but if housekeeping [can’t get to work] because of a terrorist attack, I could, as a hotel owner, have [CBI] coverage,” said Wilson.

“Once the terrorism is certified, all of the coverages in the policy come into play.”

Consider the Boston marathon incident, said Christian Waeldner, vice president, crisis management and political risk at Starr Cos.

“You had a bunch of restaurants and hotels in close proximity to the finish line who were indirectly impacted by the bombing. … It took a quite some time for life to get back to normal in the city center after the bombing and that’s a huge financial impact.”

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Waeldner said Starr Cos.’ cyber and terror response product includes contingent BI that can be triggered by a terrorist event within two miles of an insured’s property, even if they are not directly impacted.

But it’s important to remember that the Boston bombing was never declared a terrorist act. Products such as Starr’s or Lockton’s new terrorism crisis solutions offer more comprehensive coverage that doesn’t require the Secretary of the Treasury to certify an act of terrorism.

Stand-alone terrorism policies often have a distinct advantages for insureds, said John Welty, practice leader for SUITELIFE from program administrator Venture Insurance Programs.

“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.” — Jan Schnabel, managing director and director of risk management with HUB International’s Hospitality Practice

“A stand-alone terrorism insurance program can help to reduce the gray areas of where our standard insurance policies are providing coverage,” he said.

“Depending on the policy form obtained, you may find some coverage for cancellation of booking or non-physical damage,” added Truono, but “a lot depends on your business exposures, what markets you buy from, and how much you’re willing or able to spend.”

Even in cases where one has cancellation of booking included in their terrorism policy, it is very likely that the coverage is sublimited, well below the several hundred million dollars of limits you may have for direct property damage, he said.

Loss of attraction is a specialized time element coverage that may provide some relief. But like cancellation of booking, the coverage is typically subject to low sublimits and is often subject to annual aggregate, not per occurrence, limits as well.

Risk managers should keep in mind that it can be complicated to prove a loss, said Turono.

“As risk managers, we have to be able to support the loss and demonstrate that the loss of net income was a result of the terrorist act, despite no physical damage to one’s own property.

“For example, in the hospitality industry, we would need to show that the reduction in room occupancy, RevPAR and ultimately net income, is a direct result of the terrorist act which results in interruption of our business due to guests’ or customers’ inability to freely and safely access the hotel.

“Likewise, loss emanating from leader property interruption (airport, convention center, etc.) ingress-egress, and/or military-civil authority may also support the basis for a claim.”

Customized Coverage

“The terrorism policies are pretty staid and strict and there’s a lot that they don’t cover,” said a Western U.S. risk management professional for a large resort and casino operator.

That can potentially leave risk managers on the hot seat if the C-suite assumes that buying any kind of terrorism policy means the company will be covered no matter what the circumstances.

“The worst thing is to have your boss think that, ‘oh we have terrorism coverage so anything that happens around here might be covered,’ because that’s not necessarily the case,” the risk manager said.

But the marketplace is changing for the better.

Sheri Wilson, national property claims director, Lockton

Sheri Wilson, national property claims director, Lockton

We’ve gone from basic terrorism add-ons that most owners didn’t even look twice at [to] new offerings in the marketplace that are more comprehensive because of events such as [those in] Orlando and San Bernardino,” said Sean Spagnoli, vice president and client executive for HUB International’s hospitality practice.

“The notable changes are the new contingent products where you don’t have to have damage just to your location. It can be an event that happens anywhere from a 5 to a 50 mile radius.”

One such product from Florida-based New Paradigm provides parametric and contingent terrorism coverage for business income, extra expense, loss of attraction and brand protection. Coverage triggers can include terrorism occurring within a predetermined radius from insured locations, or occurring at other predetermined locations that could cause a loss.

“It will allow you to pick and choose different hotels and different scenarios,” said the Western U.S. risk professional, and it also offers the kind of capacity he needs for a large organization.

For many companies, said Addison, that kind of capacity is the key.

“Someone like MGM or Caesars … the amount of money going through those facilities a day — $10 million in coverage isn’t going to cut it. If they were to have a substantial event in Vegas and people just cancelled their reservations and were scared to go there, they’re going to need more like a quarter billion, half a billion.

“If they go from a 90 percent occupancy down to 60, that’s a lot of revenue because they’re making money from the food, they’re making money from the gambling. Then the question is — how long does it take before it comes back? Before people feel safe again?”

“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent.” — Joe Addison, executive vice president, JLT Specialty

These conversations need to happen with the CFO, experts agreed.

Finance and risk management need to look closely at what could make people afraid to come to your properties and how it would affect the balance sheet, or significantly impact share price or investor ownership value or dividends.

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“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent,” said Addison.

When you look at what companies pay in property insurance, the potential financial exposure to non-physical could be so much bigger, he added. “You could lose a lot more by having occupancy at your hotel drop by 50 percent for three months.

“At the end of the day, the idea of something out of your control affecting your business scares the crap out of people.”

Risk Mitigation

Decisions about terrorism coverage, said experts, should be part of a larger process that includes a detailed risk assessment, the creation of a comprehensive crisis management plan specific to acts of terrorism, and simple measures to reduce the likelihood of becoming a target.

A good risk assessment doesn’t have to be expensive, time-consuming or interfere with operations, said Peter DiDomenica, former director of security policy at Boston’s Logan International airport, and president of security firm Quantum Innovation Corp. It can be as straightforward as reviewing the geography and physical layout of the property and evaluating existing training and security measures.

“It’s going to give you a road map for everything else.”

Most U.S. hotels and resorts haven’t undergone the level of “hardening” common in many other countries, but it’s important to take all reasonable measures, experts said.

“We have hundreds of thousands of people at a hotel,” said the resort and casino risk manager. “If someone just starts shooting, you can have a huge loss of life that impacts your property, your workers’ comp, your liability and your reputation worse than anything else.

Steve Truono, vice president of global risk management and insurance, Starwood Hotels & Resorts

Steve Truono, vice president of global risk management and insurance, Starwood Hotels & Resorts

“The reputation is the thing that is very difficult to do anything with. So it makes sense to do as much as you can on the front end because you’re limited in what you can do after something happens.”

That said, most U.S. property owners are reluctant to anything that might appear extreme.

You want to “harden your properties, but do it in a soft way,” said Tarique Nageer, leader for U.S. property terrorism placements with Marsh USA. “By the nature of hotels, you can only do so much because they’re free-flowing places so you don’t want to impede guests or visitors … so you’ve got to weigh those needs.”

There are surprisingly simple ways to improve a property’s risk profile, said DiDomenica. Just trimming the hedges could be enough to “make it less inviting in terms of the physical environment for someone who’s going to do surveillance or plan an attack,” he said.

Staff members can also play a key role in helping to thwart an imminent attack, said Reggie Gibbs, senior underwriter and product manager with Starr Cos. In hotels, for example, they have the best handle on typical guest behavior and what might constitute a red flag.

“They can spot when a car is parked in an unusual place,” he said. “They know when a guest has been in a room for an extended amount of time and for some reason isn’t letting housekeeping in to clean.”

Brokers and insurers are key partners throughout the process. They have the experience to help insureds assess and quantify risks and coverage parameters. Truono, for instance, asks brokers to explain coverage through hypothetical claim scenarios.

“I don’t want to solely focus on coverage terms, but I also want to understand how the policy will be interpreted in the event of a claim. I want to understand how and if a claim will be covered, because in the end, that’s the inherent risk transfer value and what we are buying.”

An Evolving Risk

The forms and manifestations of terrorism keep changing, said Truono, and risk managers must continue to ensure their prevention and risk mitigation strategies evolve as well.

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“A truck bomb is one type of an event with specific control countermeasures,” he said. “A lone-wolf or individuals who enter a hotel with IEDs [improvised explosive devices] or automatic weapons, however — that’s a totally different type of event requiring  specialized tactics and controls, and it’s necessarily more difficult to manage.”

“How do you protect yourself against situations where someone just wants to kill people rather than destroy a building?” asked Nageer.

The harsh reality is that no one and no place is immune from terrorism acts.

“We must remain vigilant, aware and informed,” said Truono. “We need to continue to educate our people and enhance our prevention and response strategies. Our practices, processes, priorities and physical plants must be dynamic and continually adapt to ever-changing landscape and information.”

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Manager Focus

Better Together

Risk managers reveal what they value in their brokers.
By: | June 1, 2017 • 11 min read

Michael K. Sheehan, (left) Managing Director, Marsh and Grant Barkey, Director of Risk Management, Motivate International Inc.

Ask a broker what they can do for you and they will tell you. But let’s ask the risk manager.

What do risk managers really need in a broker? And what do the best brokers do to help risk managers succeed in their jobs?

Chet Porembski, system vice president and deputy general counsel, OhioHealth Corp.

Risk managers say it’s a broker who helps them look knowledgeable and prepared to their bosses. It’s someone who sweeps in like a superhero with an ingenious solution to a difficult problem.

Risk managers want to see brokers bring forth better products year after year. They want a broker who shows up at renewal time with new ideas, not just a rubber stamp.

Great brokers embed with the risk management team and learn everything they can about the company and its leaders. They help risk managers prepare and keep tabs throughout the year on changes at the organization with an eye towards planning the future.

“There’s the broker that sees themselves as just a hired ‘vendor,’ or I should say, somebody that basically just does the job at hand,” said Chet Porembski, system vice president and deputy general counsel at OhioHealth Corp.

“And then there’s the broker that views themselves very much as a business partner.  They truly bring added value to the relationship.”

These brokers look at the tough issues the risk manager is facing and bring in the resources to try to help their client in ways even the client might not have thought about yet. They also do advanced planning that makes the risk manager’s job easier when a problem arises.

“That’s the kind of broker I want.” Porembski said.

And that’s the kind of broker many risk managers need more than ever.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust.” — Frances Clark, director of risk management and insurance, Sentara Healthcare

That’s because risk managers are under increasing pressure these days. They carry more weight as corporations shrink their departments to cut costs.

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Climate change, cyber threats and geopolitical shifts are turning what were once unthinkable losses into risks that are almost commonplace. And this is all happening in an under-insured risk environment, according a study by PwC entitled Broking 2020: Leading from the Front in a New Era of Risk.

Thankfully there are good brokers out there, risk managers say, who can bring more value to a client today than ever before and help ease that fear.

Brokers — the traditional intermediary in the risk transfer chain — do in fact have a tangible and growing role in developing viable and innovative solutions for the risk manager, according to PwC’s study.

They are the “global risk facilitation leaders.”

“[Whatever] organizations are doing in the short term — be this dealing with market instability or just going about day to-day business — they need to be looking at how to keep pace with the sweeping social, technological, economic, environmental and political (STEEP) developments that are transforming the world,” PwC said in the report.

Advisors That Are Getting It Done

Cyber risks are just one growing challenge that all organizations grapple with.

Frances Clark, director of risk management and insurance at Sentara Healthcare, remembers when her broker first suggested that she hold a leadership tabletop cyber drill.

Clark said her broker kept saying, “I know this is going to be a painful experience, but you are going to come out so much better in the long run.”

Frances Clark, director of risk management and insurance, Sentara Healthcare

Her broker was right, and went so far as to help arrange a system-wide drill that included representatives from the legal, finance, security, communications, marketing and medical teams.

They reviewed the many ways a cyber attack can happen and then practiced a response.

“We benefitted greatly from that exercise,” Clark said.

When Doctors on Demand developed a telemedicine app to offer mental health services through mobile devices, the company ran up against insurance limitations across state lines. All states require that the physician giving the advice be licensed in the same state where the patient is located.

The concern was for patient encounters where the patient actually crossed state boundaries during the encounter, due to the utilization of a mobile phone. The patient may have started with a properly licensed physician in the original state, but then crossed into a neighboring state where the physician was not licensed.

Larry Hansard, a regional managing director at Arthur J. Gallagher & Co., and a 2017 Power Broker®, worked to secure medical professional liability coverage without the traditional licensure exclusions placed on medical professionals by insurance carriers.

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The initiative he helped develop actually changes how health care can be delivered to patients. It allows the emerging telemedicine sector to now offer services around the world.

Two-thirds of the risk managers in the PwC Broker 2020 survey labeled their brokers as “trusted advisors.” But the same survey found that some participants see their broker as more of a straightforward service provider rather than as a source for solutions.

The survey results indicate there is plenty of room for brokers to bring more value to clients.

OhioHealth’s brokers meet each year with OhioHealth’s risk management team to review insurance coverages.  And when the health system holds quarterly risk management retreats, the brokers attend. They bring with them education and insights on a broad range of topics, from property insurance markets to cyber solutions.

Porembski’s brokers also collaborate with the risk managers when there’s an upcoming presentation on risk issues to senior management. Sometimes the brokers help prepare the presentation, he said.

“We end up looking exceptionally good to our senior leaders and our board,” he said.

Involving the broker in interactions with leaders outside the traditional risk management team has benefits beyond selling products, he said. It extends the relationship circle.

Clark tries not to think of her brokers as outside vendors just providing a service. She wants them to be as committed and knowledgeable about the organization as she is.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust,” Clark said.

“You have to be completely open and honest about everything, no matter how bad it is, or how bad it may look to the market or underwriters.”

“Once you establish that trusting relationship, I think everything else falls into place,” she adds.

Sentara underwent significant growth recently, acquiring five hospitals in about six years. The expansion required a vast amount of integration on insurance programs and a merger of risk management departments and claims.

Clark said her brokers rolled up their sleeves and expertly navigated her through the consolidation.

“I can’t reiterate enough how most risk managers don’t know how to deal with an M&A unless you’ve gone through it.”

She said she wouldn’t have been able to manage the risk of the mergers without her broker’s counsel.

Grading the Broker

Mike Lubben, director of global risk management at Henry Crown & Co. in Chicago, sets standard expectations of his insurance brokers: know the exposures, understand how a risk manager has to sell ideas internally and understand the urgency of requests.

He lets his brokers know his expectations with regular report cards, complete with letter grades. And he isn’t shy about giving out Fs.

  • How did the broker service the EPLI coverage?
  • Did the broker provide expertise and coverage analysis?
  • Was there anything creative?
  • Did the broker recommend new endorsements based on the previous exposure?
  • Did the broker recommend any risk mitigation programs?
  • How well did he communicate and help with presentations?

“A good broker will think this is fantastic,” Lubben said.

This method starts the conversation. It helps Lubben establish long relationships with some stellar brokers.  But if the broker misses the mark, Lubben can have a talk with them about ways to do better in the future. Some brokers he has sent away.

Recently a broker failed on what Lubben calls “blocking and tackling,” the basics like returning phone calls within one day and responding promptly to emails.

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Lubben gave him an “F” on those subjects and told him why. The broker still didn’t improve his game and was eventually replaced.

For many people, insurance can seem very routine from renewal to renewal. But a really good broker will break from routine and come back with some kind of enhancement or improvement.

If the renewal is flat with no change in premium, then Clark says she’ll ask, “What are you going to do for me this year?”

The best brokers are always striving for better, she said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.” — Mike Lubben, director of global risk management at Henry Crown & Co.

Motivate International Inc., which operates more than half of the bike share fleets in North America, went through a recent renewal.

Their broker, Marsh, explored more than 10 options with different strategies and programs. In the end, after all of that, they decided the expiring coverage was the best fit.

“Those exercises are very valuable for risk managers,” said Grant Barkey, Motivate’s director of risk management.

“As an innovative company committed to delivering best-in-class services, we believe thorough exploration leads to informed decision-making.”

A good broker understands that a company’s day-to-day operations and a highly effective risk management program have implications for what type of policy should be procured, he said.

Brokers need to partner with risk managers to figure out what those options are, and what the markets are saying and then succinctly relay the information to management.
They also need to have the tact and curiosity to inquire about future plans and figure out what resources might be needed to better serve their client.

When PwC surveyed risk managers, most put their insurance carriers and industry groups ahead of their brokers as the primary source of cyber and supply chain risk solutions; yet these areas are still cited as risk managers’ top concerns.

“Becoming the go-to partners for developing and coordinating innovative and effective solutions in these priority risk areas is at the heart of the commercial opportunity for brokers.” PwC said in its report.

“Yet, our survey suggests that these are important areas where brokers are falling short of the market’s demands and therefore need to adapt.

For example, less than a third of respondents are very satisfied with brokers’ analytical and modelling services across a range of areas.”

When participants were asked how their brokers could be more efficient, respondents put risk analysis at the top of PwC’s survey list. Significantly, more than a third also cited ‘big data’ analysis.

Finding the Right Fit

Paul Kim, Co-CBO of U.S. Retail at Aon Risk Solutions, helps match brokers to risk managers. He keeps in mind that insurance companies tend to sell product, while the clients are looking to manage risks. The right broker assists in mapping risks to existing products and also customizing broad solutions, he said.

“The risk manager’s job has become more complex in the current environment, but there are so many tools available for those individuals to make better informed decisions that truly help protect the overall risk profile of their companies,” Kim said.

Paul Kim, Co-CBO of U.S. Retail, Aon Risk Solutions

That’s why finding the right broker should be first and foremost, he said. Look for an individual with strong industry knowledge, product expertise and market relationships. A strong broker is able to effectively communicate what the risk manager’s goals are to the marketplace to be able to execute and achieve those goals.

“Not every broker can do that,” Kim said.

“Not every broker is the right broker.”

PwC said those brokers who quickly master the art and science of identifying ambiguous threats and then mobilize a broad private/public stakeholder pool to economically manage those risks over time will pull ahead of their competition.

“We’re really generalist,” Lubben said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.”

When selecting a broker, the risk manager should also take into account the entire organization behind the broker. Ask about the additional support systems that are available to the broker’s clients.

The company should have a deep bench so when the primary broker is out of the office there’s someone else to rely on who is almost as knowledgeable. The broker organization should also be able to assist you with your budgeting and forecasting from a financial risk perspective.

In PwC’s survey of risk managers, nearly three-quarters want analytics from their broker to help inform their decisionmaking, with concerns over new and emerging risks being a strong driver for this demand.

Clark also thinks it is vitally important for a broker to offer a claims advocate, somebody on the outside, when you are dealing with a carrier on a complicated claim.

“Otherwise you are vulnerable to what the carrier says,” Clark said.

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To lead in this new era of risk, it’s also important that brokers forge close relationships with a broader set of stakeholders that includes governments, academia, specialist risk consultancies and even their industry peers, PwC said in the report.

It’s also going to be important to develop shared databases and research capabilities.

In turn, brokers need to assure this diverse stakeholder group that they are the right party to lead.

Clark, at Sentara Healthcare, said she knows what her risk exposures are today, but she’d like her brokers to anticipate her needs before she does.

“It’s kind of crazy, but amazingly some of them do it,” Clark said.

The broker will also use past experience and industry knowledge to anticipate where policy terms and conditions can be tweaked and improved upon.

“They will, say, advise us that we need to change this policy language, and then a year later you have a claim on that and you thank your lucky stars that they changed it,” Clark said.

“It is amazing to me every time it happens.”  &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]