P&C insurers must understand “evolving” terrorism risk: report

Growing political instability in the world, combined with civil unrest and the expansion of new technologies has led to a major shift in the nature of terrorism risk and how it needs to be addressed in the property and casualty market, a new report suggests.

In its recently released report, Tensions Building: the Changing Nature of Terrorism Risk and Coverage, global reinsurance intermediary Guy Carpenter contends that global unrest and questions around the definition of terrorism mean companies have to take a harder look at their coverage.

“For insurers with terrorism risk on their books, it is important to understand how this threat is evolving, the varying risks in different regions and what developments and risks are likely to impact the globe in 2013 and beyond,” David Flandro, Managing Director and Global Head of Business Intelligence for Guy Carpenter notes.

“Unlike some other perils, the human element inherent to terrorism risk makes it an unpredictable and challenging risk to quantify and manage. With heightened global instability and uncertainty here for the foreseeable future.”

Terrorist attacks reached a peak in 2006 and have been declining since then, Guy Carpenter notes. However, terrorism-related events are still at historic highs, and the nature of terrorism is changing, the report says.

On a per risk basis, Guy Carpenter estimates that about $2.5 billion of capacity for terrorism and sabotage coverage is currently available in the facultative reinsurance market.

While global threats still remain, since the Sept. 11 attacks of 2001, the terrorism threat has shifted to “softer targets” and more localized attacks, the report notes. Global volatility in parts of the Middle East, North Africa and Europe has allowed for more localized, territory-specific losses, the report suggests.

“Nevertheless, the increase of loss frequency in the facultative market has not yet affected the general market,” the company notes. “Instead…changes to capacity and pricing can be expected primarily at the local level.

The expanding use of the Internet and social media has also allowed for the nature of risk to shift and has added to global volatility, Guy Carpenter says.

The definition of terrorism is also a major issue in the risk landscape, the report says. The definition differs among countries, leaving gaps for insured and reinsureds, it states.

Terrorism coverage is often incorrectly believed to cover all violent human acts resulting in property and business interruption losses, Guy Carpenter says, when in actuality, the events must meet specific definitions of an “act of terrorism,” which may vary across markets, in order for coverage to apply.

“The industry has consequently seen a renewed global interest in political violence coverage, which provides comprehensive protection regardless of how an event is defined,” it notes.

Several countries, such as the United States, United Kingdom, Germany, Israel, India and Northern Ireland, have introduced compulsory or optional terrorism reinsurance pools, the report adds.

The future of the U.S. Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) will, however, be an upcoming issue for the market there, the report notes. The act is due to expire in December 2014, and if it’s not extended, Guy Carpenter says terrorism insurance would likely be greatly reduced for many areas of the U.S. that have the most need for coverage.

Timeline: 10 Costliest Terrorism Events (1990 – 2012)