Economic Impacts of Terrorism

02 May 2018

According to the Institute for Economics and Peace, the economic impact of terrorism globally has averaged USD 79 billion over the last five years. Very little of this has been insured. Closer analysis of this global overview reveals some interesting observations. Of the estimated USD 84 billion economic impact in 2016, 99% was concentrated in ten countries (2). The overwhelmingly bulk of this impact was suffered in Iraq, Nigeria and a number of other countries experiencing a spectrum of violence from terrorism and insurgencies to war.

Economic losses are most apparent where terrorism is persistent, impeding countries’ economies over the long term. The economies of the United States, France, Spain and the United Kingdom have all recovered well from isolated incidents, including 9/11, the Madrid bombings and 7/7. It has nevertheless been shown that the persistent campaigns in Israel and by Basque separatists in Spain impeded their economies over time. Developing economies lack the diversity to show resilience to the threat and it is no coincidence that insurance take-up in these areas of the world is low. Western economies are more resilient to isolated acts of terrorism, diverting or delaying consumer spending or relying on other economic sectors during a period of downturn. In less diverse economies, or in industries that operate in those regions, there is a more tangible need for insurance support, where it acts as the conduit between separate economic pillars.

Tunisia and Egypt depend heavily on tourism and have suffered in recent years after a spate of attacks in both countries. Tourism accounts for one-sixth of Tunisia’s GDP but tourism numbers fell by 25% in 2015 after the attack in Sousse. Revenue dropped by 35% as a result and has taken over two years to recover. Perception is also a consideration. Western tourists, with less intimate knowledge of the region, consider the terrorist threat to be persistent and not contained. Egypt and Tunisia have shown some signs of resilience, however,
boosting domestic and Asian tourism and relaxing fiscal measures.

Standalone acts of terrorism still have an impact locally in the West. This may be geographical, industrial or business specific, and where the (re)insurance sector plays a crucial role in mitigating economic shocks. Whilst 9/11 incurred an insured loss of USD 45 billion (inflated to 2017 values), direct and indirect economic losses have been estimated at USD 67 billion and USD 195 billion respectively, revealing sizeable opportunities for the industry to do more. In Manchester, businesses in close proximity to the 2017 Manchester Arena attack were certainly impacted, as was the hospitality sector more broadly after it suffered a short-term downturn; but the city as a whole still seems to be performing well compared to the rest of the United Kingdom.

Recent cases such as Merlin Entertainment’s reported losses (which the company partly attributed to terrorism), and the financial plight suffered by London Borough Market businesses following the attack there in June 2017, are examples of where appropriate cover is needed to provide localised resilience. Aviation carriers that operate in Europe all reported short-term downturns but appear to have recovered quickly. Those that depend on North African tourism were less resilient, however, with the collapse of Monarch Airlines a prominent case in point.

Areas that lack resilience suffer more from terrorism and at the same time insurance is an enabler of resilience. Lack of resilience is both an opportunity and a threat to insurers: where it is not present, there is the potential for accumulated losses to build over time; but where, collectively, the insurance market is present, resilience increases.


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