Don’t rely on alternative markets for terrorism coverage, Swiss Re warns

Insurance-linked securities (ILS) will not be able to provide adequate coverage for terrorism risk for the foreseeable future, warns a Swiss Re report.
Because the ILS market is still in its infancy and terrorism risk has limited insurability, a sufficient market for terrorism bonds may never develop, Swiss Re researchers wrote.
Issuance in 2006 of catastrophe bonds, the most mature segment of the ILS market, was US$10 billion, an amount that would be dwarfed by the potential size of insured losses from a single, large terrorism event.
“A pure terrorism bond would require rating agency evaluation and would have to overcome investor resistance,” the report says. In order to rate the risk, agencies would have to rely on third-party models that have yet to be fully developed,” it adds.
Even with a rating, investors would be reluctant to buy terrorism bonds due to a lack of reliable loss frequency estimation, researchers continued.
“Since investors feel most comfortable with risks that insurers underwrite, terrorism bonds will ultimately serve only to supplement, but not replace, insurance.”