Does your company have an effective risk transfer program?

Following the global financial crisis, organisations are seeking new ways to reduce costs while still retaining their service and corporate governance standards. This has led many companies to review their spending to ensure they are getting value for money.

One area that is being reviewed by large organisations is their risk transfer programme, specifically their terrorism insurance spend which is traditionally based on property value.

Restructuring terrorism insurance based on intelligence led risk assessment and quantification can lead to significant savings, as well as providing evidence-led purchasing which underpins strong corporate governance.

Terrorism risk is often transferred at 100% of property value, irrelevant of location, risk exposure or potential maximum loss. Businesses are now seeking to identify how terrorism risk can be transferred appropriately, without necessarily tying it to the total property value.

Unless a terrorist group is able to produce and deploy a high yield nuclear weapon (which is excluded from terrorism insurance policies), the worst case terrorism scenario, in terms of property damage, is considered to be a very large Vehicle Borne Improvised Explosive Device (VBIED).

It is anticipated that any group employing a very large VBIED will target locations that conform to the group’s aims, therefore the risk is higher in certain areas (for example in close proximity to government institutions) than it is in others.

Analysis of credible terrorism exposure, informed by the assessment of the relative probability and consequence of a worst case terrorism incident, can be used to represent a company’s terrorism risk to the insurance market in order to ensure appropriate risk transfer and premium spend. This approach often allows organisations to either reinvest saved capital into other risk management projects, or simply reduce their total cost of risk.

There are two phases to accurately determining the true cost of risk. The first phase assesses those assets that are exposed to a credible terrorism risk through semi quantitative risk analysis. This includes grading each asset, by expected probability and consequence of a terrorist attack, in order to identify the scale of the terrorism insurance programme. The scoring is based on a number of factors, including proximity of property to known target locations and previous exposure of assets.

The second phase establishes the Probable Maximum Loss (PML) at a small selection of representative sites – including the highest value sites at risk, and any site that is critical to the wider operation of the organisation.

Analysis of the effect of a worst case terrorism incident should be conducted for those assets where terrorism risks are credible and expected to inform the scale of financial exposure. This is expected to be a large VBIED, but can be tailored to meet the findings of the risk assessment.

PML studies provide organisations with scientific evidence of their true exposure, meaning their risk transfer programme is comprehensive and cost effective.

In addition to the true cost of risk, companies now have more choice for the coverage they purchase. This also leads to financial benefits as wider coverage can be bought for specific high risk locations, with standard cover for the majority of assets, depending on their location and purpose.

Organisations should discuss their risk transfer programme with their broker to ensure that it provides:
• Flexible loss limits on terrorism – allowing reduction in premium spend
• Ability to cover selected locations – adaptable to specific exposures
• Allows coverage of overseas locations – allowing one, simplified global programme
• Broadest definition of terrorism – including political and religious/ideological attacks
• Minimum rated security – delivering peace of mind through contract certainty

Paul Bassett MC, Global CEO, Crisis Management, Aon Risk Solutions