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Industry Backgrounders: Insurance

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Partners in Prevention Industry Backgrounders

Insurance

Overview

In March 2009, Admiral Dennis Blair, then-Director of National Intelligence, stated that the global financial crisis ushered in new challenges to US and international security. Blair contended that the financial crisis resulted in an increased number of weak and failing states that could foster conditions conducive for the unfettered operation of terrorists bent on harming Americans.

With the US executive branch and Capitol Hill grappling with pending cuts to military, national defense, and homeland security spending – including the very programs dedicated to limiting terrorist access to vulnerable nuclear weapons-usable materials around the globe – traditional counter-proliferation and counterterrorism tools face yet another impediment. The insurance industry could be a critical new ally in preventing proliferation and promoting global security.

The traditional insurance industry has three essential functions that could prove useful in containing global security challenges: risk-sharing, price discovery, and mitigation.

  • Risk-sharing: While risk-sharing does not directly reduce the likelihood of losses from a WMD terror event or some other breach, insurers (and reinsurers) guarantee that private development can continue in the face of rising trafficking threats.
  • Price discovery: The process offered by all insurers which relies largely on computer models and modeling firms to help estimate both the probability and effect of insurable incidents. While predicting the likelihood of catastrophic events is challenging, the actuarial science perfected by the insurance industry, combined with computer-based simulations and modeling techniques, offer a major benefit to insured clients and potentially even governments seeking to prevent, and if necessary, respond to a WMD incident or other breach.
  • Mitigation: Perhaps more interestingly, the insurance industry yields secondary benefits by mitigating undesirable behavior. This is the process by which insured parties take actions to reduce their expected losses in order to obtain lower premiums. The incentive to mitigate is created by risk-based premiums, whereby each insured party pays a premium commensurate with his or her risk.

 

 

It is possible to extend these principles to combat global WMD proliferation and related criminal activity. Partners in Prevention aims to explore a more institutionalized set of market and policy arrangements to stem illicit activities in this manner.

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Related Links

A Win-Win for Government and Insurers: Partnering for Security 
An essay by Stimson’s Debra Decker in Carrier Management (October 9, 2013).

2009 Annual Threat Assessment of the Intelligence Community
Prepared remarks of Admiral Dennis Blair before the Senate Select Committee on Intelligence (February 12, 2009). 

Responding to WMD Terrorism Threats: The Role of Insurance Markets
Chapter 9 in WMD Terrorism: Science and Policy Choices (Stephen Maurer, ed., 2009)

 

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