Terrorism as a Form of Risk That Is Impossible to Manage - Essay Example

Terrorism is a form of risk that is impossible to manage Terrorism has been a major threat for all people around the world. It effects to the social and financial framework of a particular region can vary in accordance with the targets set by the ‘groups’ that have prepared the relevant acts. In this context, Fleming (1998, 27) admits that ‘an ever-increasing reality in the world today is the threat of terrorism; the significance of the threat cannot be overstated because terrorism transcends both geographic and demographic boundaries; no community or organization is immune from acts of terrorism’. In fact, the above views present the reality as it has been experienced by many people around the world after a series of relevant attacks that have been occurred in U.S., in Spain, in Britain and in almost all countries of the Middle East region. From another point of view, Kunreuther (2006, 38) has supported that ‘natural disasters and terrorist attacks are examples of what have been classified as low probability-high consequence (LP-HC) events; despite the first half of their title, these events are now in the headlines with increasing frequency’. It should be noticed however that although the above events are considered as quite possible to be repeated frequently, there is no sufficient provision for their prevention. Moreover, it has been stated that ‘there are features of these potentially catastrophic events that need to be carefully examined in order for individuals, firms, and governments to take steps today to reduce the risk of their occurrence in the future and to reduce the consequences should they occur; every government in the world faces the question of how to help its citizens face the risks of catastrophe but reducing these risks requires a concerted effort by individuals and firms’ (Kunreuther, 2006, 38). This weakness of the state to respond effectively to the needs of individuals and institutions that have suffered significant losses from terrorist attacks has led to the need for the creation of specific programs offered by insurance companies that focus on the provision of compensation to the victims of terrorist attacks (either individuals or organizations). Under these terms it has been found that ‘the institutions, programs, and policies that provide benefits to businesses and individuals affected by an accident, natural disaster, terrorist attack, or other type of loss can be thought of as a system composed of four primary compensation mechanisms: insurance, the tort system, government programs, and charity; together these mechanisms determine the fraction of losses borne by injured parties, the parties responsible for paying for the losses, the time to payment, and the transaction costs associated with the transfers; together they also create incentives for physical and financial risk management for both businesses and individuals’ (Dixon et al., 2006, 292). However, even given the existence of the above mechanisms the compensation offered to the victims of terrorist attacks is usually unequal to the damage caused to them by these events. The extremely high cost for the coverage of the relevant damages could be possibly considered as a reason of such a situation. More specifically, regarding the event of September the 11th in U.S., Keating (2002) notice that the role of insurance companies is major to the coverage of losses in all cases of damage, however, in the case of terrorism insurance companies are rather unable to respond at least at the required level. At a next level, the above researcher states that ‘before the September attacks, insurance companies routinely wrote policies that covered terror losses at a small charge; surely this was one of the largest financial miscalculations in history, as this essentially free coverage led to the largest insured loss ever, exceeding $50 billion; the insurance industry was in a state of financial shock; with their capital decimated by the losses, most reinsurers, the companies that insure the insurance companies, soon warned they would no longer offer insurance for terrorism; the market was in turmoil, with insurance companies scrambling to raise rates and exclude coverage in an attempt to recoup some of their losses while one thing was clear: insurance consumers could expect no more free terror insurance, if they could get coverage at all’ (Keating, 2002, 44). The cost of the events of September the 11th for the insurance companies has been significant leading most of the companies of this industry in a severe financial turbulence. However, it cannot be supported that such a development would be logically expected even by the most experienced financial or commercial analysts. In order to examine the particular character of terrorism as an insurance-related event, we should primarily proceed to the presentation of its definition. In this context, the Department of Justice ‘defines terrorism as "a violent act or an act dangerous to human life, in violation of the criminal laws of the United States or any segment to intimidate or coerce a government, the civilian population or any segment thereof, in furtherance of political or social objectives"; It should be noted that certain events, including criminal acts such as industrial sabotage, may fail to meet the definition of terrorism since they are not "in furtherance of political or social objectives’ (Fleming, 1998, 27). From a similar point of view Wilkinson et al. (2006, 6) supported that ‘terrorism is not a synonym for violence or insurgency in general, but it is a very broad concept; terrorism is a weapon-system, which can be used by an enormous variety of groups and regimes with rapidly differing aims, ideologies and motivations’. As an event of significant importance, terrorism is ‘constituted’ from 5 sub-events or sub-categories. More specifically, it has been found that the terroristic events can be divided into the following categories: ‘(1) biological, (2) chemical, (3) explosive, (4) incendiary, and (5) nuclear; while most terroristic events involve one of these, the use of multiple types of terrorism against a target cannot be ruled out; likewise, the simultaneous deployment of more than one terroristic act at a single location or at multiple locations must be considered’ (Fleming, 1998, 27). The presentation of the nature, the characteristics and the contents of terrorism as presented above can be helpful to the identification of its effects to the area of organizational management particularly with its sector that deals with the provision and the evaluation risk involved with possible terroristic events within a specific business environment. On the other hand, insurance has been considered as the most common ‘tool’ for the protection of the business by possible terroristic effects. More specifically, in accordance with Kwon (2003, 36) ‘insurance has traditionally been termed a risk management tool where one party (the insured) transfers, for a front-loaded cost (the premium), part or all of its specific loss exposure to another party (the insurer) through a legally binding contract; the insurer in return promises to fulfill its obligations upon the occurrence of a qualified loss (the claim); this promise can be described as contingent capital that the insured secures for future use, subject to the terms and conditions of the contract’. The parts of the insurance scheme as presented above are usually common in all cases of insurance cover regarding a potential damage. However, in many cases, there are terms or procedures that have to be differentiated mainly because the needs of a particular ‘insured’ are expected to be increased after the intervention of the ‘event of damage’. As of the particular ‘sector’ of the managerial activity that is responsible for the evaluation of a potential terroristic event within the organizational environment, this is the risk management which is structured as follows: ‘1. identification and evaluation of exposures to loss, 2. development of cost efficient and effective alternative tools and techniques to effectively avoid, retain, transfer and/or control those exposures, 3. selection of desirable alternatives within applicable budgetary constraints (e.g., using objective standard internal rate or return (IRR) and/or net present value (NPV) methodologies), 4. implementation and administration of the chosen alternative (s), with 5. dynamic monitoring and feedback systems to better assure long term effective ness and efficiency of the ongoing effort’ (Ferguson et al., 2003, 31). The ‘stages’ of risk management within a business environment as described above are common for all types of organizations. In some cases however different schemes and initiatives are observed that can be explained by the existence of personal views and aspects of the participants (managers). From another point of view, Fuller et al. (2002) supported that the protection of an organization from possible terroristic events could be possibly achieved through the work of the comprehensive vulnerability management which ‘can be defined as holistic and integrated activities directed toward the reduction of emergencies and disasters by diminishing risk and susceptibility and building of resistance and resilience; the values, decisions, and policies that guide comprehensive vulnerability management are based on careful and continued assessments of the liabilities and capabilities from both the physical, social, and organizational environments’ (Fuller et al., 2002, 275). It is not made clear however by the above researcher whether the above department is exclusive within a specific business, i.e. if there is no need for the risk management department, or whether these two sectors should be operate simultaneously within a specific organization. As for the particular insurance scheme which is going to be selected by an organization regarding its protection from a potential terroristic action, this will be chosen in accordance with a series of standards set by the structure and the financial strengths of the specific organization. At a next level, this effort has to proceed through an independent security (IDS) setting, i.e. a scheme ‘in which each individual or firm that is part of an interconnected system must decide independently whether or not to adopt protective strategies; these measures can reduce the risk of a direct loss, but there is still some chance that the individual or firm can suffer damage from others who do not adopt similar measures’(Kunreuther, 2006, 38). However, even if all the necessary initiatives have taken place, there is the issue of the option made by the responsible manager and the issues on which this selection has been justified. From a specific point of view Kunreuther (2006, 38) stated that ‘the economic incentive of any decision-maker to invest in protective actions thus depends on whether it expects others to follow suit--a classic case of game theory; the protective strategies can be direct risk-reducing measures as well as information-gathering and preparedness strategies’. Moreover, Flemming (1998, 28) found that ‘four major issues are considered when evaluating an organizations degree of exposure to a terroristic event: (1) how centralized or decentralized the organizations operations are, in that this will determine the impact on overall organization operations, (2) whether mission-critical activities or systems would be affected, (3) which operations would likely be affected, and (4) how great an impact a terroristic event in one facility or part of an organization could have on other facilities or parts of the operation as a result of task interdependencies’. The presentation of the above issues cannot lead to the assumption that the relevant list is exclusive, i.e. there still may be other issues which have to be taken into consideration when evaluating the organizational risk for exposure on terroristic events. The ‘reaction’ of the organization in similar events of the past could be possibly also considered as such an issue while the existence of possible ‘alliances’ that could support the firm financially in case of such an event would be a supplementary issue for consideration. On the other hand, Montana et al. (1983, 137) tried to explore the structure and the types of privately owned protective services and came to the conclusion that these services can be divided into ‘total protection services and limited protection services: the total protection services will provide countermeasures to deter terrorist activity and alert executives, employees, and their families to actions to be taken in the event of an attack; the framework of this security program is executive protection, crisis management, and consultation; the limited protection services are resources added to the entire executive protection program; these may include insurance, defensive driving, armoring vehicles, bodyguards, and research data; it is the combination of these preventive protection services that are vital to the organization, for no one protective service will provide the needed defense for eliminating terrorism’. The structure of these services is however only one of the series of issues that need to be examined before deciding on ‘engaging’ on a particular scheme. More specifically, the study of Yohan et al. (1979, 159) has shown that ‘the response of the insurance companies must obviously follow the pattern of terrorist attacks of the future; indeed, good advice given to corporations by the insurance industry may go some way toward preempting points of potential weakness while there is still considerable scope for underwriting those risks that are currently excluded by market practice, from ordinary insurance policies, and for which no special market has yet been developed’. However, in order for the above efforts to be effective towards the targets set, it would be preferable if cooperation with the government could take place. The participation of the governmental bodies in the relevant insurance schemes could lead to the increase of the protection offered in terms that in case that a terroristic event would take place the state would participate financially to the coverage of the relevant losses. For this reason it has been supported by Yonah et al. (1979, 159) that the protection offered by an insurance company could be combined with ‘a government scheme and might include the physical damage of property from terrorist action, consequential losses following sabotage, and perhaps an insurance policy to reimburse companies for the increased costs of protecting themselves should they become specific targets rather than merely reimbursing them for out-of-pocket expenses after an event’ (Yonah et al., 1979, 159). However, even given the simultaneous existence of both the above schemes, the effective respond to the coverage of the losses caused by terroristic events should not be regarded as highly expected. From another point of view Dixon et al. (2006, 292) supported that ‘insurance and compensation for terrorism losses have implications for national security; this link with national security is typically absent from insurance and compensation policy for other disasters, such as earthquakes and hurricanes; as a general rule, the provision of national security is an accepted role for government’. On the other hand, regarding specifically the case of terrorism, it has been supported that ‘the connection of terrorism compensation and insurance policy with national security provide another rationale for public involvement in markets for terrorism insurance; this involvement goes beyond the different types of market failures in terrorism insurance markets discussed in other parts of this book and elsewhere; three aspects of national security are related to the compensation system: reducing physical vulnerability, promoting solidarity, and enhancing economic resilience’ (Dixon et al., 2006, 292). Because of the above issues, it is necessary for the organizations to examine carefully all parameters before proceeding on the implementation of a specific insurance scheme. Regarding this issue, Kwon (2003, 39) stated that companies ‘need to be aware that gaps in coverage, or noncompliance to the legal aspects of the insurance contract, can result in a denial of claims; thus, a corporation must thoroughly examine the terms and conditions of insurance coverage; in addition, insurance contracts commonly contain provisions designed to comply with principles of indemnity, insurable interest and utmost good faith; to minimize problems of moral hazard and adverse selection; and to make relatively certain of the insurance protection period (e.g., claims made vs. occurrence-based policy forms in liability insurance)’ (Kwon, 2003, 39). A significant point of the above study is the notion made regarding the importance of the terms of an insurance contract. In this direction, it has been supported by Ferguson et al. (2003, 36) that ‘the exact method by which individuals and organizations around the world perceive, analyze, quantify and respond to risk is beyond measure and likely to remain a mystery; however, influences based on cultural differences inherent in socioeconomic factors, including values and norms, religion and nationality, clearly play in important role while the process of risk management remains a dynamic and highly complex undertaking that continually poses interesting challenges for decision-makers, on many levels, around the world’. The above assumptions however should be evaluated only regarding the risk management in general and not specifically as part of the protection against terroristic events. A relevant research made by Wilkinson et al. (2006, 57) proved that ‘the preparedness of the private sector is extremely patchy: in the City of London and some other major cities in the UK considerable planning and preparation has been completed covering evacuation plans, planning for business continuity and long-term recovery and resilience; however, in other parts of the UK, without the experience of the London Police and its efforts to engage with the private sector, there has been far less progress, where partnership building between the police and the private sector is at a very early stage; this is a big mistake; London is a high profile target but there is no evidence to suggest that terrorists only mount attacks in capital cities’. The lack of sufficient preparation against possible terroristic events in small cities in Britain can lead to the assumption that risk management is not operate effectively even at the governmental level. The case of Britain is just indicative. In fact, there are many areas around the world that are not protected towards possible terroristic events. On the other hand, one could support that the existence of an extended net of legislative rules and principles can possibly guarantee the protection of all regions within a specific country. The above assumption can only be hypothetical without the necessary support from empirical findings. Regarding specifically the business environment, the protection against terrorism through the use of appropriate insurance schemes or other similar ‘tools’ cannot be considered as adequate. In fact it has been proved in many cases in the past – September the 11th has been the most representative example – that the borders of an institution (either governmental or private) to fully cover the losses caused by terroristic events are limited. On the other hand, Montana et al., 1983, 137) supported that ‘to organize the protective service resources into effective responsive protective services requires appropriate program design, administration and management; the wording, direction, supervision, inspection and development of resources to provide programs is critical to program effectiveness’. However, even all the above practices are followed by an organization it cannot be guaranteed that it will be able to recover after a terroristic event. The schemes offered by insurance companies regarding the risks of such nature are of course very helpful towards the financial support of the company after suffering such an event, it cannot though predicted if this support will be sufficient when an event of this kind ‘harm’ a particular organization. It is only afterwards that such an evaluation can be accurate. References Dixon, L., Reville, R. (2006). NATIONAL SECURITY AND PRIVATE-SECTOR RISK MANAGEMENT FOR TERRORISM. Rand Institute for Civil Justice, 292-304 Ferguson, W., Theil, M. (2003). Risk Management as a Process: An International Perspective. Review of Business, 24(3): 30-37 Fleming, D. (1998). Assessing Organizational Vulnerability to Acts of Terrorism. SAM Advanced Management Journal 63(4): 27-33 Fuller, C., Johnston, C., Mcentire D., Weber, R. (2002). A Comparison of Disaster Paradigms: The Search for a Holistic Policy Guide. Public Administration Review, 62(3): 267-285 Gips, M. (2005). Terrorism Insurance Called Inadequate. Security Management, 49(9): 30 Head, G. L., Horn, II, S. (1991). Essentials of risk management. Malvern, PA: Insurance Institute of America Keating, D., (2002). The Trouble with Terror Insurance. World and I, 17(3): 44 Kunreuther, H. (2006). Risk and Reaction: Dealing with Interdependencies. Harvard International Review, 28(3): 38-43 Kwon, W. (2003). The Role of Insurance in Corporate Risk Finance. Review of Business, 24(3): 36-43 Montana, P., Roukis, G. (1983) Managing Terrorism: Strategies for the Corporate Executive. Westport: Quorum Books. Yonah, A., Kilmarx, R. (1979). Political Terrorism and Business: The Threat and Response. New York: Praeger Read More