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Cyber Terrorism Premiums

Cyber Terrorism Premiums
28th September 2009 ICSR Team
In FREErad!cals

In 2007, John Robb wrote a short book, Brave New War: The Next Stage of Terrorism and the End of Globalization (Hoboken, NJ: John Wiley & Sons.), which has been largely ignored in mainstream terrorism literature.  Elsewhere, it has received a lot of attention, principally amongst students of fourth-generation warfare (4GW: ‘networks against states) and fifth-generation warfare (5GW: ‘networks against networks).  This includes a lot of military thinkers, particularly in the US.

At one point in the book, Robb talks about ‘urban takedowns’ (pp.108-110), in which he describes how cities―as the hubs of modern economies―operate effectively through market equilibria of costs and benefits.  If disruption occurs―such as in the form of terrorism―the costs may begin to outweigh the benefits, and the effect of this might be viewed as a form of tax (based on an idea by Harrigan & Martin):

A terrorism tax is an accumulation of excess costs inflicted on a city’s stakeholders by acts of terrorism.  These include direct costs inflicted on the city by terrorists (systems sabotage) and indirect costs because of the security, insurance, and policy changes needed to protect against attacks.  A terrorism tax above a certain level [c.10%] will force the city to transition to a lower market equilibrium (read: shrink).

Relationships between terrorism and insurance are not exactly new to 2009 but a recent story from Lloyds of London is the first public statement I’ve seen of the potential impact of ‘cyber terrorism’ on insurance premiums, along the trajectory Robb describes.

Cyberspace is a growing source of exposures for companies and governmental institutions and that includes cyber terrorism and cyber extortion, says Paul Bantick, professional liability underwriter at Lloyd’s insurer Beazley.

‘Contrary to popular belief, the people involved are not eccentric individuals but are more likely highly motivated, sophisticated and organised groups—whether criminal or political’, he says.

‘… domestic threats exist too and could be more of a danger.  Young, smart, tech-savvy groups could use cyberspace to make a political statement, [Beth Diamond of Beazley] warns.’These people could, for example, be local anti-capitalist groups targeting a financial institution or single issue extremists targeting a life sciences company.”

Some business sectors are ahead of others in their preparedness, according to Bantick, and that includes buying insurance.  ‘We find that financial institutions and life science companies in particular are very concerned about data breaches and the loss of confidential data’, he says.

‘At the same time, these clients are concerned about cyber extortion, linked to activism, and our [insurance] coverage responds to that.’

I have nothing profound to offer in response to this.  I’d be amazed if actuaries weren’t flicking their abaci around to generate income, particularly in a recession; I wonder if the premiums go down when the threat level does?  It’s interesting to note that ‘terrorism’ is not considered the preserve of the jihad – it may have financial, as well as other political, drivers.  I think this is one of those ‘watch this space’ issues, and I’m sure John Robb has his eye on such things.

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