Wendy Peters: a pioneer in the terrorism insurance industry

Wendy Peters is an executive vice-president at Willis, the insurer, and is responsible for its terrorism practice. Over the past decade, she has been one of the pioneers in the terrorism insurance industry, and played an important role in the battle to persuade the US Congress to renew its backstop for terrorism damage, the Terrorism Risk Insurance Act (TRIA).

How did you enter the insurance industry?

I majored in foreign affairs and I always knew I wanted to do something in that area. The attraction [to insurance] was political risk insurance, which means insuring companies' investments in politically contentious and dangerous places against risk of confiscation by government, currency issues and so on. You see the global hotspots and how companies operate around the world.

Terrorism insurance is rather esoteric. What brought you into it?

It goes back to 9/11. Terrorism as an insurance speciality was not identified then as an individual cover. It was included within political risk insurance. Insurance markets were not prepared for 9/11 and the type of catastrophic loss that could occur.

What were the first issues you dealt with in the job?

Insurers had no way to model terrorism, or anticipate attacks - unlike natural catastrophes where there are frequency models. So the [US] market decided to drop out [of terrorism insurance]. Insurance markets said: 'We can't price this'. It's an interesting field to be in, because the networks of terror attack change all the time.

But there had been terrorist attacks on buildings before. The City of London was bombed in the 1990s by the IRA.

That was the genesis of Pool Re, the UK terrorism pool. UK insurers were reluctant to insure, because there was no way of predicting the risk, so the government offered a backstop for insurers and it has become very lucrative, the [insurance] pools have done very well.

In the US, when insurers dropped out, in 2002, the government passed TRIA which provided a backstop and was free, unlike Pool Re, to which insurers had to contribute. Generally TRIA has been an easy-to-access, affordable programme for the insurance market, with the government ultimately on the hook.

What has happened since?

TRIA was renewed in 2005 and 2007 and added contributions that gave insurers a bit more financial exposure. Since it was passed, we have had only one big terrorist attack, on the Boston Marathon, and the government did not certify that as a terrorist event under TRIA, which was surprising. [If aggregated property and casuality insurance losses, resulting from the act do not exceed $5m the event is not certified as terrorism under TRIA].

A lot of companies that were affected by it hadn't bought terrorism insurance. As it wasn't classified as a terrorist attack they could claim under their property and personal accident policies.

Late last year, the outgoing Congress unexpectedly refused to renew TRIA and the insurance cover expired, leaving some of the world's biggest buildings uninsured against terrorism. You lobbied for its renewal. What were the risk management implications for property owners?

It created amazing chaos over Christmas. Most major properties in the US went into some form of default [on their borrowings], with lenders threatening to do a forced placement insuring the building themselves and requiring the property owner to pay the premium. The insurance market was going crazy.

What was the impact on property owners? Was the problem resolved?

The new Congress came in January and got the extension to the floor, and it was passed. In the meantime, some insurance companies had imposed minimum premium lengths, so owners had to buy cover for six months or a year, at at least two or three times the normal annual premium, in some cases considerably more.

Insurers immediately settled back into the status quo. The next time this issue comes around is in 2020, although the new legislation said that Congress would review it midterm and see if it makes more sense to restructure it.

What terrorist threats do we face?

There is a lot of focus on cyber attacks and hackers, for example on utilities and power generation facilities. The US infiltrated Iran's nuclear power plant - that's the kind of scenario we are looking at more and more.

How do you deal with threats like that?

We're trying to be a lot more analytical in our approach. We develop models, for example blast models showing probable maximum loss for various types of blast [in a building]. It helps building owners and investors to understand what their vulnerabilities are.

There are a lot of scenarios in which it is almost impossible to take down a building. For example the new World Trade Center towers have among the highest construction standards anywhere in the world. We are seeing a lot of innovation in building design.

Is it hard to hire people with the tech, finance and political skills you need?

Cyber security is the one product line that is growing rapidly . . . There are very few specialists in the field. I counselled my son-in-law: "If you're going to get into anything, get into cyber because it's such a big field and growing so quickly".

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