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- Report n°3: Financial protection of critical infrastructure
Report n°3: Financial protection of critical infrastructure
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Table of contents
- On the morning of September 11 2001 : financial protection and new vulnerabilities
- September 11, 2001 : Insurance against a new form of terrorism
- On the morning of September 11 2001 : financial protection and new vulnerabilities
September 11, 2001 : Insurance against a new form of terrorism
This radical change in the nature of the terrorist threat materialized tragically on the morning of September 11. The terrorists did not attack the United States with letter or car bombs, the stereotypes of terrorism. Nor were the attacks physically aimed against air transport infrastructures (attacks against aircraft or airports). On the contrary, they misappropriated the traditional purpose of one of the country's vital networks and in so doing, took advantage of its fantastic capacity for meshing and dissemination, to propagate a large-scale attack which as a result, was much more destabilizing and deadly.
On the morning of September 11, after four aircraft had been turned into flying bombs, each element of the network - every aircraft still airborne - became a potential threat. Uncertainty as regards the number of skyjacked aircraft was an aggravating factor which narrowed down official decision-making options. The entire air travel network was potentially at risk and the American authorities had no other choice but to prohibit commercial flight over the entire airspace, with obvious repercussions on global aviation; it was the first time in the history of the United States that such a decision was taken.
It is for that matter remarkable that the anthrax attacks in the fall of 2001 represented a similar case of misappropriation of the dissemination capacity of vital networks (the postal network), rather than direct attacks against the network itself (16).
The costliest event in the history of insurance
The terrorist attacks of September 11 killed more than 3000 people and injured more than two thousand others. The scale of compensation for victims and their families(17) and for corporations was infinitely larger than it had ever been before in the history of insurance.
The attacks inflicted direct economic losses evaluated at 80 billion dollars, out of which 32.5 billion were covered by insurers and reinsurers (a total of 150)(18) (Hartwig, 2004). In comparison, the three costliest acts of terrorism for the insurance community before then had been the London bombing on April 24, 1993, the one in Manchester on June 15, 1996 and the one against the World Trade Center in New York on February 26, 1993. These three attacks were the cause of losses insured for 900, 750 and 725 million dollars respectively (prices at the 2001 index).
To put this figure of 32.5 billion dollars of losses in perspective, Table 2 shows the 10 most severe natural or man-made disasters in the last thirty years. They are classified by the amount of insurance compensation paid. It is to be noted that except the 2001 attacks, all of them were natural.
(16) In the case of the anthrax crisis, every envelope could possibly be contaminated by anthrax and the degree of actual contamination of the system was unknown. The entire American postal system was therefore a potential risk and the possibility of closing it down completely was seriously considered. The USPS, the world's largest postal service, processes some 680 million letters and packages every day in the United States; to close it down for just one week in order to gain better insight into the sources and degree of contamination of the system, would mean re-starting a network with a backlog of more than 4 billion items, to which would be added also the indirect effects on the world's postal networks. A few days later, Europe was also in a state of alert and obliged to rethink means of intervention not just on a national (or even local) scale, but in European terms, requiring coordination between a host of actors (governments, network operators, worker representation, users of these vital networks, insurers, etc.) See Boin, Lagadec, Michel-Kerjan et Overdijk (2003).
(17) The Federal Victim Compensation Fund, created immediately after the attacks to compensate victims and their families, has paid out 5 billion dollars in compensation to date (Smetters, 2004).
(18) As already pointed out, terrorism was generally not excluded in commercial insurance policies in the United States before 9/11.
By adding insurance reimbursements (32.5 billion dollars) to the amount of compensation paid out by the American federal government through the creation of the US Federal Victim Compensation Fund to victims of 9/11 (almost 5 billion dollars(19)), the total amount of compensation connected to the September 11 attacks is close to 40 billion dollars (excluding private donations to victims' associations). This amount is almost double that paid after hurricane Andrew which devastated the coast of Florida in 1992 and had been so far the single most costly event for the insurance industry. It is five times as much as the compensation distributed in France after the great storms in December 1999 (private insurance against storms and the Cat.Nat. system for flood damage after storms).
One essential feature of the September 11 attacks for the insurance industry was the hyper-correlation of damages: several portfolio lines whose frequency of loss was not usually highly correlated were affected simultaneously. Figure 1 shows the breakdown of this 32.5 billion per portfolio line: workers' compensation, life, health, general liability, aviation, loss of business, etc.
We should also note that configuration of the attacks was such that the highest risk was not damage to property (the twin towers) but reimbursement of loss of business connected to interruption of activity: 11 billion dollars, i.e. a third of the total amount of insured losses.
(19) Smetters (2004).
