2006 Global Terrorism Ranking

INDIA AND RUSSIA RANKED HIGHER THAN AFGHANISTAN

US makes list of Top 50 Highest Risk Countries

Jardine Lloyd Thompson (JLT) Estimates Gaps in Terrorism Insurance Policies Could Cost US Companies $130 Billion in Event of Large Scale Attack

India and Russia, two of the most popular destinations for foreign direct investments (FDI) in 2005, are ranked second and third, respectively, right behind Iraq in JLT’s ranking of the riskiest courties in which to do business in 2005. The top ten also included other popular FDI destinations such as Indonesia, the Philippines and Turkey, which all ranked higher than Afghanistan. The United States made the top 50, coming in 41st.

Dr. Michel Léonard, JLT Emerging Markets Chief Economist. said: “These ratings, which use economic and political intelligence and historical loss data, remind companies to look beyond headlines and assess their exposures in large FDI destinations and not just those that have a long history of terrorism.”

He added: “India attracted more than $5.5 billion in foreign direct investment in 2004-05, an increase of 18%. However, the number of terrorist attacks in India is among the highest in the world – even if we exclude incidents in the troubled Kashmir region – and we do not see this situation improving in the short or the medium term. Similarly, the Philippines has had high numbers both in terms of frequency and severity for more than five years, affecting companies in both rural and urban areas.”

John Minor, President of JLT Emerging Markets commented: “Many companies suffer from a false sense of security due to a strong disconnect between perceived and actual risk and what’s covered under their existing policies.”

While industry statistics show that nearly twice as many companies buy terrorism coverage today than they did in 2001, a review of the riskiest countries on JLT’s 2006 Global Terrorism Ratings and the type of terrorism coverage bought in the US reveals three major areas of concern for companies: lack of coverage against terrorism in the highest risk countries, lack of protection against terrorism related trade disruption, and exceptions about what qualifies as terrorism under existing policies.

JLT estimates that these three main gaps in coverage could result in uninsured losses totaling US$130 billion for US businesses in the event of a large scale attack. While the threat of terrorism outside the US is ten times greater than in the US, only 10% of US companies buy standalone coverage against terrorism overseas. In addition TRIA, the Terrorism Reinsurance Act, currently does not protect US companies against terrorism attacks abroad. Similarly, while trade disruption losses make up 60% of losses as a result of a terrorist attack, only 1% of companies buy such coverage.

“To get a sense of exposure, assuming another attack on the scale of September 11th, companies could face up to US$50 billion in uncovered trade disruption losses in the US and up to US$80 billion in uncovered property losses abroad,” said Dr. Léonard.

Mr. Minor adds: “One of the challenges in modeling terrorism losses and probabilities is defining the risk event. When analyzing terrorism risks, some analysts do not distinguish between acts of terrorists and other forms of political violence, such as civil disobedience, civil commotion and insurrection. Distinguishing between such events would be entirely academic if not for the fact that terrorism policies have strict definitions and leave out civil commotion, riots, and even specific forms of terrorism such as extortion and acts of sabotage. Coverage currently available through TRIA, for instance, does not cover acts committed by domestic terrorists, such as the Oklahoma City bombers.

When reviewing a company’s exposure to terrorism both in the US and abroad, such distinctions are critical to identifying the right type of coverage, says Mr. Minor. In Ecuador, Guatemala and Bolivia, for instance, JLT rates the risk of civil commotion much higher than terrorism risks, so buying a standard terrorism policy covering local operations there would not provide the cover required. JLT’s ratings are designed to help companies differentiate and prioritize these risks, making it easier to identify which coverage is best suited for specific risk environments.

Another challenge in analyzing terrorism risks is assessing the total financial impact on a company’s business globally, according to Mr. Minor. “Most companies tend to focus on bricks and mortar exposures when analyzing terrorism risks, and yet the financial impact of a terrorist incident that cuts off a key supplier or customer could be far more significant than a terrorist attack on the company’s manufacturing plant.” Moreover, the threat of terrorism is not limited to the risk of a direct hit on the company’s own assets – or that of its key supplier or customer; the threat of a terrorist incident in the vicinity of the company’s normal trading routes could be enough to cause a serious disruption to the company’s business.

JLT advises companies to review their risk exposure to terrorism and identify the right type of coverage, and take advantage of JLT’s Risk Profiler, a systematic risk analysis for business, in conjunction with JLT’s Global Terrorism Risk Ratings.

Mr. Minor added: “A growing number of risk managers and their boards, responding to compliance issues related to Sarbanes Oxley, are moving beyond news headlines and looking at terrorism not just as a domestic and property issue, but also in terms of emerging markets and supply chain issues, especially companies outsourcing to India or China. With close to US$130 billion in uninsured exposure, the issue clearly has balance sheet implications.”

JLT Terrorism Ratings

JLT’s Global Terrorism Risk Ratings provide risk managers a systematic assessment of the risks facing their operations both in the US and abroad. The ratings take into account a variety of qualitative and quantitative factors such as frequency, severity, multi-year trends, footprints across regions, and ideological and political fragmentation, and provide a forward-looking assessment of corporate losses.

JLT Emerging Markets rates terrorism risk as part of its Global Political and Economic Risk Ratings that assess 12 different risk categories, including war, insurrection, terrorism and supply chain disruption, based on historical loss data and analysis of country risk information from a variety of sources.

By Avril O’Connor

The Jardine Lloyd Thompson group of companies is a leading risk management adviser and insurance and reinsurance broker. JLT is also a major provider of employee benefits administration services and related consultancy advice. Jardine Lloyd Thompson Group plc is quoted on the London Stock Exchange and is the largest European-headquartered company providing these services and one of the largest firms of its type in the world. JLT operates out of more than 100 offices in over 30countries and employs more than 5,000 personnel. www.jltgroup.com

TRUSTEES IN LEGAL FIRING LINE OVER POTENTIAL PENSION EXPOSURE IN TERROR ATTACKS, WARNS JARDINE LLOYD THOMPSON

Many pension funds, which would be required to pay death in service benefits in the event of a fire or terrorist attack, or any disaster causing a multiple loss of life amongst the workforce, may struggle to meet their financial obligations, says JLT Risk Solutions Ltd (JLT).

The World Trade Center 9/11 tragedy demonstrated the potential loss that life insurers could have, where there are high concentrations of exposure at a single location. The consequence is they now typically impose a maximum event limit they will pay per policy following a catastrophic event.

This means that many companies, particularly those with high concentrations of employees in UK city centres*, may not have enough insurance to adequately cover the death in service benefits of all those who might lose their lives in a catastrophic event.

Company pension schemes generally provide a death in service payout of two to four times salary in addition to a dependents’ pension, which may be paid to the spouse and children. The spouse and dependants’ pension exposure depends on personal circumstances but can be as high as sixteen times salary.

A company could easily find that the event limit in its policy is less than the total Death in Service promised. This could expose the pension fund and company to uninsured risk. Trustees could also be open to legal action by dependents, if proved that the y had not been prudent when negotiating coverage.

Andrew Davis, of JLTs Accident and Health team said: “When joining a pension scheme an individual assumes that in the event of his or her death, dependents will be provided for as per the contract of employment. Now, any payout could be restricted and shared amongst all the claiming parties, reducing the value of that benefit to the individual."

“This is a serious issue which pension trustees need to address as exposures can be multiples of the event limit being imposed. We have seen event limits as low a £35m, which is an insignificant figure compared to the exposure per location faced by some companies.”

JLT has negotiated insurance cover for companies facing event limit restrictions.

Mr Davis explains: “Our main concern is to provide enough cover to protect pension schemes against their exposures from any multiple death catastrophe. Not only will our coverage respond to a fire, or a natural catastrophe, it will also respond to terrorist attacks, including those that involve nuclear, chemical and biological agents ”

*such as Bath, Belfast, Bolton, Birmingham, Bristol, Cambridge, Cardiff, Carlisle, Colchester, Coventry, Derby, Edinburgh, Exeter, Glasgow, Halifax, Huddersfield, Leicester, Liverpool, London, Manchester, Maidstone, Middlesbrough, Newcastle, Norwich, Nottingham, Oldham, Oxford, Portsmouth, Reading, Sheffield, Southampton, Swindon, York etc.

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