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INTRODUCTION

This primer, FEMA 429, Insurance, Finance, and Regulation Primer for Terrorism Risk 
Management in Buildings, is a part of the Multihazard Risk Management Series of 
publications that addresses terrorism risk in buildings. The objective of this primer is 
to introduce the building insurance, finance, and regulatory communities to the issue 
of terrorism risk management in buildings and the tools currently available to manage 
that risk. Insurance, finance and regulation are considered the 'change levers' of the 
built environment. They are the principal mechanisms for the evaluation and 
management of risk exposure in buildings. These change levers play a critical role in 
introducing and maintaining standards for risk management and public safety. 
CHANGE LEVERS FOR TERRORISM RISK REDUCTION 
Risk management in the built environment is a complex issue that involves a range of 
decision-makers in all phases and at all levels in the building development, design, 
construction, and management process. The traditional market mechanisms for 
estimating, pricing, and distributing risk are the insurance and finance industries. The 
established mechanism for defining society's acceptable risk levels in the physical 
environment is the public 
regulation of development, including zoning and building regulation. 
Risks related to hazards such as fire, earthquake, flood, asbestos, and lead paint have 
been dealt with through these mechanisms. These risks have been identified and 
assessed, and applicable actuarial data has been collected. Physical measures for risk 
reduction have been developed and defined. Residual risks have been quantified and 
mechanisms for risk transfer are in place. 
The process of understanding and managing of terrorism risk is at its very beginning. 
All of the mechanisms of the traditional building risk management process must be 
engaged to address the issue of terrorism risk. They must understand the threat, 
develop the measures for risk reduction, and motivate the implementation of 
appropriate risk reduction measures. The building design and management 
communities must develop the physical and operational solutions. But it is the change 
levers of finance, insurance, and regulation that can motivate and reward the 
implementation of those solutions.


INTERVENING IN THE BUILDING INVESTMENT PROCESS 
It is necessary that guidance on the design, construction, and 
rehabilitation of buildings to reduce terrorism risk be made available to 
architects, engineers, and constructors. The other publications of the 
FEMA Multihazard Risk Management Series provide this guidance. 
However, architects, engineers, and constructors implement the 
programs and directives of their clientsÑ building developers and 
ownersÑwho must be aware of the opportunity and the benefits of in-
vesting in terrorism risk reduction measures before they decide to make 
such investments. 
What motivates building owners to make invest
ment decisions about their buildings? Most 
owners view their buildings as revenue generators, 
not as instruments of social policy. Owners invest 
in buildings in order to realize an economic return. How can owners 
be persuaded that investments to reduce their vulnerability to terrorist attack will 
make business sense? 
Figure 1-1 is a schematic representation of the building process as it addresses the 
issue of terrorism risk reduction. Buildings are the final product of this process. 
Designers and builders are key actors in the implementation of physical mitigation of 
risk, but 
Figure 1-1: Terrorism Risk Reduction Decision-Making

building owners and change levers are the key decision-makers regarding 
management of risk in buildings. In order to introduce physical or operational 
change in buildings (to reduce terrorism risk), it is necessary to intervene at several 
points. 
Builders who actually construct the buildings must be guided by the plans and 
specifications developed by the design professionals (architects and engineers). The 
design professionals are, in turn, guided by the programs and demands of their 
clients, the owners. Building owners have functional, financial, and esthetic objectives 
that may or may not specifically include risk management. It is the change levers that 
are most sensitive to risk management needs and are in a position to effectively 
leverage owner interests that are communicated to designers and builders. 
It is of key importance that owners demand appropriate mitigation measures in 
design, that designers have the specific technical guidance to provide required 
mitigation measures, and that builders have the technical capability to implement 
appropriate designs. However, highest in this causative chain of decision-making are 
the change levers that influence the entire process that ultimately determines the end 
product. 
If investments cannot result directly in added profit in the form of increased rents or 
reduced operating costs, they will not be made, unless owners are induced or forced 
to make them by the change levers. The change levers must create an environment 
that demands and rewards investment in safety. 
Regulators force such changes through laws that mandate terrorist resistant building 
design and construction. Lenders induce such changes by requiring them as 
conditions of the loan to acquire or construct the building, or by adjusting interest 
rates or other terms of the loan. Insurers can motivate such changes by relating 
premiums to risk and rewarding effective mitigation 
In order to introduce these changes, it is necessary for the change levers to 
understand the character of terrorism risk, understand available risk reduction 
measures, and be able to evaluate related costs and benefits. This primer provides 
this information.


PRIMER ORGANIZATION 
Insurance 
Chapter 2 of this primer provides information on terrorism risk management for the 
insurance industry. 
The insurance industry consists of three primary segments, each of which has a 
unique role in the assessment of terrorism risk, and therefore can benefit from 
familiarity with the information in this primer: 
. _ Direct insurers 
. _ Reinsurers 
. _ Agents/brokers 

The industry is supported by a complex infrastructure, each component of which will 
be able to use this information: 
. _ Overseers/regulators 
. _ Technical support 
. _ Think tanks (risk modelers) 

. _ Lobbying groups 
. _ Independent advisors and consultants 

The industry also segments itself by product lines. Some of these lines have a direct 
relationship to building safety features, and others may have an indirect relationship: 
. _ Property, liability, and business interruption 
. _ Workers' compensation 
. _ Health (and health maintenance organizations) 
. _ Life 

Buyers of insurance are represented by various associations such as the Risk and 
Insurance Management Society (RIMS), and the Apartment and Office Building 
Association (AOBA). 
Finance 
Chapter 3 of this primer provides information that will be of use to both commercial 
and multifamily lenders, including: 
. _ Loan originators 
. _ Loan servicers 
. _ Secondary markets 
. _ Bond markets 

Regulation 
Chapter 4 provides information on terrorism risk management for the building 
regulatory community. 
There are four categories of building regulation that have the potential to address 
terrorism risk reduction, and each has its own array of audiences: 
. _ Zoning and planning regulations 
. _ Property maintenance codes 
. _ Building rehabilitation codes 

_	Construction codes (building, mechanical,
plumbing, electrical)

All four categories of building regulation include extensive reference to voluntary 
standards that are developed by a wide array of organizations. 
These regulations are enforced by a variety of local and/or state agencies, each 
represented by trade associations, including: 
. _	Building officials and building departments 
. _	Fire marshals and fire prevention bureaus 
. _	Health departments 
. _	Planning and community development de-
partments and agencies


Due Diligence for Terrorism Vulnerability Assessment 
Chapter 5 provides information on due diligence for terrorism vulnerability 
assessment for individual buildings and facilities. 
Methods for threat assessment and vulnerability assessment are described and a 
framework for a qualitative terrorism risk 'vulnerability estimate' is presented. 
Guide to Expertise and Tools 
Chapter 6 provides reference to resources, including: 
. _	The Terrorism Risk Insurance Act of 2002 
. _	Building Vulnerability Assessment Screening 
. _	A general glossary 
. _	A chemical, biological, and radiological glossary 
. _	A list of acronyms 

. _	A list of associations and organizations related to terrorism risk 
management 
. _	A bibliography