"All Quiet on the Western Front?"

February 2007

Let's consider two related questions: "What was the most important event in 2006 affecting the domestic terrorism insurance market, and what is the most important event on the horizon in 2007?" In this case, the future appears more certain than the past.

by James Macdonald
Navigant Consulting

Most stakeholders agree that, assuming no major attack occurs in the coming months, the renewal or expiration of the Terrorism Risk Insurance Extension Act (TRIEA) is easily this year's most critical issue. Enacted in the final days of 2005, the TRIEA extended by 2 years the Terrorism Risk Insurance Act of 2002. Although slimmed down with fewer commercial lines included in the program, the continuation of the federal backstop has ensured the affordability and availability of commercial insurance for foreign-sponsored acts of terrorism.

But what was the single most important development in 2006? My informal survey of various stakeholders suggests that, depending on your perspective, there are at least seven possible candidates for the "most important" rating (in chronological order):

• Osama Bin-Laden's January warning of an impending attack inside the United States;
• The February 22 bombing of the Shiite Askariya shrine in Samarra, triggering what many believe is now mainly a civil war in Iraq;
• The August interdiction by British agents of the planned explosions by Islamic terrorists of as many as 15 commercial airplanes headed to the United States;
• The late September issuance of the Presidential Working Group report to Congress on the future availability and affordability of terrorism insurance;
• Also in September, the Government Accountability Office (GAO) report on the insurability of terrorism attacks involving chemical, biological, radiological, or nuclear (CBRN) agents or devices;
• The surprising November election results; and finally
• By year-end, the fact that no foreign-sponsored major terrorist attack occurred in the United States for the fifth consecutive year since September 11, 2001.

In Part 1 of this article, I will consider the events above as they relate to the changing nature of the terrorism threat. The implications of the lack of any attack, the deteriorating situation in Iraq, and the August interdiction of a planned airline attack are less than clear. Two opposing schools of thought appear to be emerging. Let's consider each.

"Don't Worry, Be Happy?"

At one extreme, the lack of any attack is leading some to question the reality of the threat itself. In a controversial article in the fall edition of Foreign Affairs, Ohio State University's Professor John Mueller presents what I believe could grow into the "Don't Worry Be Happy" perspective on terrorism. Although he does not totally discount the possibility of another major attack on the scale of September 11 or worse, Dr. Mueller calls the many warnings of an imminent attack "extravagant huffing and puffing."

Despite an intensive effort to uncover possible terrorist threats with many thousands of foreign nationals interviewed or detained, Dr. Mueller reports that very few terrorists have been convicted for a terrorist crime inside the United States. After rhetorically questioning whether the "haystack is essentially free of needles" offers, Dr. Mueller offers a surprising conclusion (assuming his reference point extends beyond the borders of Columbus, Ohio):

• If Al Qaeda operatives are as determined and inventive as assumed, they should be here by now. If they are not yet here, they must not be trying very hard or must be less dedicated, diabolical, and competent than the common image would suggest.

In addition, Dr. Mueller presents a feel-good, statistical argument that the probability that any individual American will be harmed by a jihadist attack is almost nonexistent:

• … the total number of people killed since 9/11 by Al Qaeda operatives outside of Afghanistan and Iraq is not much higher than the number who drown in bathtubs in the United States in a single year and that the lifetime chance of an American being killed international terrorism is about one in 80,000—about the same chance of being killed by a comet or a meteor." (Foreign Affairs, "Is There Still A Terrorist Threat? The Myth of the Omnipresent Enemy," September/October 2006).

No doubt, this argument appeals to our collective desire for some sense of "normalcy" in our new world of risk post-September 11. But some of Dr. Mueller's key points seem to be at best myopic and at worst, dangerously naïve. Unlike domestic accidents or natural events on the earth or in the solar system, terrorism attacks are inherently intentional, lack credible statistical data inside the United States, and are subject to rapid change in the forms they may take. The operative assumption of all predictions based on empirical observations is that the past observations are predictive of the future. This is simply not the case with terrorism attacks.

At minimum, many Americans would agree with Mueller and others that politicians and the media have improperly played the "fear card" to improve their ratings or electoral results. For example, a recent editorial in the New York Times states, as an apparent matter of fact, that in 2002, "the White House used the fear of terrorism to scare the American voters into cementing the Republican domination of Congress" ("The Imperial Presidency 2.0," New York Times, January 7, 2007).

In February 2006, political philosopher Robert E. Goodin articulated this critical perspective in a provocative book, What's Wrong with Terrorism (Polity Press). Assuming we can agree that, by definition, the goal of terrorists is to spread fear in the public to achieve political or ideological goals, Dr. Goodin argues that any officials issuing warnings they know to be false or exaggerated are themselves "committing terrorist offenses against the polity, every bit as much as the bombers themselves."

Or Is the "System Blinking Red" Once again?

The 9/11 Commission Report emphasizes CIA Director George Tenet's testimony that, at least within the intelligence community, the "system was blinking red" several months before the attacks on September 11, 2001 (page 259). Is the "system blinking red" as we enter 2007? Several important events last year offer conflicting possible answers.

We began 2006 with an ominous audiotape from Osama Bin-Laden. The intended audience was apparently all U.S. citizens. After pointing to the successes of his "holy warriors" through the "explosions you have seen in the capitals of the European nations who are in this aggressive coalition" [in Iraq], Bin-Laden claimed that:

• … The delay in similar operations happening in America has not been because of failure to break through your security measures. The operations are under preparation and you will see them in your homes the minute they are through (with preparations), with God's permission. (Quoted from Full Text of the Bin-Laden Tape, Associated Press, January 19, 2006).

But, despite this warning, nothing happened (at least inside the United States). Instead, a month later, in the early morning hours of February 22, Iraq suffered what Peter Galbraith calls it's "deadliest terrorist attack" with "no one killed" when terrorists bombed the Shiite shrine in Samara (Galbraith, The End of Iraq, Simon & Shuster 2006, page 1). A week later, 184 Sunni mosques were bombed or vandalized. This began what many believe is now mainly a sectarian struggle in Iraq, with civilian deaths increasing almost every month through year-end.

What is the relevance of the worsening situation in Iraq (and arguably Afghanistan) to the domestic threat of another major attack? Some terrorism experts argue that Iraq and Afghanistan are now the "magnets in the toolbox" reducing the short-term risk of another major attack in the United States. However, longer term, as the United States exits this conflict, foreign terrorists are expected to focus on other countries (including Europe and the United States). At minimum, analysts appear to agree that Iraq has become an unprecedented on-the-job, real-time training center for a new generation of highly skilled foreign terrorists. From a risk perspective, this suggests that any short-term benefits appear to be largely offset by the increased long-term challenge.

The August interdiction by British agents of planned airplane attacks shows that the "magnet in the toolbox" argument is almost certainly a case of wishful thinking. In addition to confirming Bin-Laden's warning that an attack is being planned, it showed that the terrorists are focused on something on the scale of September 11 or worse. This sobering conclusion is labeled the "special event strategy" by Ron Suskind in his 2006 bestseller, The One Percent Doctrine:

• Al Qaeda would not want to act unless it could top the World Trade Center and Pentagon with something even more devastating, creating an upward arc of rising and terrible expectation as to what, then, would follow…. It's a "special event" strategy. The goal is to show that a war against terrorists is endless and futile and escalating, nudging Americans toward the realization that they could live happily without the United States supporting corrupt Mideast regimes, or having its soldiers on the Arabian Peninsula. (Page 180).

Another important lesson learned from the August interdiction is that an attack involving many operatives increases the probability of discovery. This is exactly what happened when a British agent was able to infiltrate the cell planning the airplane attacks. Although this is a positive development from a risk management viewpoint, it increases the probability that (unlike bathtubs or meteorites!) Al Qaeda will shift its attention to attack modes involving fewer operatives and less risk of detection.

Conclusion: Hope for the Best, but Plan for the Worst

It is highly likely that historians will agree with Mueller, Goodin, and others that the fear of terrorism since September 11 has been grossly exaggerated by politicians and the media, in some cases for disingenuous purposes. However, the most important lesson learned from both September 11 and the worsening situation in Iraq may be that we need to plan for the worst, not the best. Even one "needle in the haystack" is one needle too many if it involves a weapon of mass destruction. Continued refinements and improvements to terrorism preparedness and the pre-loss and post-loss roles of commercial insurance is now a permanent responsibility for all stakeholders in the American economy.

If we have collectively learned anything since their initial fatwa against the United States in 1996, it is that we ignore the stated intentions of Al Qaeda at our own peril. For all underwriters and risk managers, the "system" will be "blinking red" well beyond the scheduled expiration of the federal backstop insurance program at the end of this year.

Part 2 of this article considers the important 2006 developments directly affecting public policy options and the probable implications of all of these developments to risk managers.

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