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"Insuring" against WMD Terrorism: How the Insurance Industry Could Become a Key Ally in Preventing a Nuclear 9/11

Stimson Center
By Brian D. Finlay
March 30, 2009.

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For the first time since the 9/11 attacks, global terrorism has been eclipsed as the greatest national security threat facing the United States. According to a statement earlier this month by the new director of national intelligence, the worsening global financial crisis is likely to usher in a new wave of instability around the world that could threaten already-vulnerable governments. The resulting increase in the number of weak and failing states could foster the conditions conducive for unfettered operation of terrorists bent on harming Americans.

But the global financial meltdown is having adverse effects beyond the creation of additional terrorist safe-havens. Last month President Obama signed into law a new $787 billion economic stimulus plan that will push the national deficit somewhere north of $1.6 trillion. The resulting pressure on discretionary government spending could threaten critical government programs—including those designed to prevent terrorist acquisition of nuclear, biological, and chemical programs.

Unfortunately, the scarcity of financial resources is not the only barrier to successful efforts aimed at preventing terrorism. More ominous are the astonishing technological advances that are being made in the nuclear and biological sciences in countries around the globe which could be used to jump-start an offensive nuclear or bioweapons program. More and more, governments simply do not have the capacity or jurisdiction to control dangerous dual-use technologies now firmly in the grasp of private companies.

What is clear is that governments need agile, new cohorts with the wherewithal and capacity to become partners in preventing proliferation of weapons of mass destruction (WMD)—most significantly, in the private sector. But over the last six months, America's "captains of industry" have been more often exposed and condemned for their lavish lifestyles and disregard for taxpayer money than courted for their potential contribution to the common good. Where they have acted inappropriately, they should be held to account. But we should also recognize that the vast majority of industry leaders are eager to cooperate in supporting America’s interests at home and abroad—but may lack a full understanding of government priorities and objectives.

To date, dual-use technology companies and the banking sector have been central to US efforts to prevent WMD terrorism. But innovative roles for private industry in proliferation prevention are only limited by our own lack of imagination. The insurance industry has the potential to become a critical new ally in promoting global security.

"Insuring" Against Terrorism

On September 11, 2001, the terror attacks that claimed nearly 3,000 lives also caused an estimated $32.5 billion in insured losses. One immediate result was the collapse of the terrorism insurance industry – which, up until that point, had been helping the global economy deal with the catastrophic losses arising from natural disasters and man-made events through risk-sharing and mitigation. The exit of most insurers from terrorism coverage caused widespread panic, particularly in the construction and mortgage markets. Many leading economists concluded that most new construction would end in "high value" markets like New York and Washington if terrorism insurance were not made available.

Congress intervened requiring companies to provide coverage for any damages related to conventional terrorist attacks—but it excluded those attacks involving nuclear, biological, and chemical weapons. Although this effort has been widely credited for stabilizing markets for terrorism insurance, the WMD insurance market remains in its infancy because of the potentially bank-breaking claims that could result from a nuclear, biological, or chemical weapons attack. As a result, construction and mortgage markets remain stunted even before the global financial meltdown.

Despite this challenging cost-benefit analysis for private insurers, a small number of companies like Boston-based Lexington Insurance Company have ventured into the WMD terrorism industry. Today, Lexington is the dominant provider of WMD insurance to markets around the world. The results so far are significant from both an economic and a national security standpoint:   

  • Risk-sharing is a direct benefit of insurance, whereby those at risk from an event pay a comparatively small premium to an insurer, which later uses its accumulated funds to reimburse those parties suffering actual losses. While risk-sharing does not directly reduce the likelihood or losses from a WMD terror event, most economic activities – from redevelopment of the World Trade Center site in New York, to the reconstruction of the Mumbai hotels destroyed in the recent terrorist strikes in that city—could not happen without it. These insurers have ensured that private development can continue in the face of a rising WMD threat.
  • All insurers rely largely on computer models and modeling firms to help them estimate both the probability and effect of insurable incidents. Predicting the likelihood of catastrophic events—whether a hurricane or WMD attack—is especially challenging. Nonetheless, the actuarial science perfected by the insurance industry, combined with computer-based simulations and modeling techniques, offer a major benefit to insured clients and potentially even to governments seeking to prevent, and if necessary, respond to a WMD incident.
  • Perhaps more importantly, the WMD terrorism insurance industry has resulted in mitigative behavior on the part of a broad cross-section of insured clients. Mitigation occurs when risk-based insurance premiums create an incentive for insured parties to take actions to reduce the losses that would result from an event. Just as a good driving record yields reduced premiums for motorists, preventive behavior has been promoted within the transportation industry, and preparedness measures instituted by the real estate and health care sectors that reduce the likelihood of a successful WMD attack—all incented by the insurance industry.

In an era of strapped budgets and enormous transnational challenges, governments are being forced to stretch their limited dollars by developing new partnerships to accomplish their objectives. In no area is this more urgent than in the efforts to prevent WMD terrorism.  With the right mix of government incentives, the insurance industry can be enrolled as a key ally in helping to mitigate risk and prevent WMD proliferation and catastrophic terrorism. Finding the nexus where the goals of industry converge with the national security interests of the country will be the key to our success.