January 5, 2017 by Canadian Underwriter
Reinsurers are “striving to close gaps” in policies covering terrorism, while the decline in reinsurance pricing has moderated, Guy Carpenter & Company LLC suggested in a release Thursday.
“While there are many areas of focus for product expansion and evolution in the coming year, with political volatility increasing globally, terrorism coverage needs will require a high level of vigilance,” stated Guy Carpenter, Marsh & McLennan Companies Inc.’s reinsurance brokerage, in its January 1 Renewals release.
Chris Folkman, senior director of model product management at Risk Management Solutions (RMS) Inc., told Canadian Underwriter earlier that “actual insurance payouts” from terrorist attacks have been negligible.
“The economic costs of terrorism have skyrocketed, but demand for terrorism coverage has remained relatively flat,” Folkman said at the time. “And despite a proliferation of catastrophe bonds and other forms of alternative capital flooding into the property insurance market, relatively little terrorism risk has been transferred to the capital markets.”
In the United States, since 2002, the Terrorism Risk Insurance Act has stipulated, essentially, that property insurance must cover terrorism. The U.S. government would share losses under certain conditions.
After 19 Al-Qaeda operatives hijacked four airplanes Sept. 11, 2001, “terrorism risk insurance quickly became either unavailable or very, very expensive and unaffordable,” U.S. Congressman Gregory Meeks told the House of Representatives during a debate in 2014 on extending the program. “Prior to 9/11, insurance companies generally covered all of the costs of terrorist attacks,” Meeks added at the time. “After 9/11, terrorism risk insurance quickly became either unavailable or very, very expensive and unaffordable.”
Under the U.S. program that provides a federal backstop, an act of terrorism is one that is “violent” or dangerous to human life, property or infrastructure. TRIA coverage applies to damage within the U.S., or outside the U.S. in the case of certain air carriers and vessels, or on the premises of a U.S. mission. To be considered terrorism for the purpose of TRIA, an attack would have to be “committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.”
In 2013, RIMS recommended that TRIA require the inclusion of coverage of acts of terrorism involving the use of nuclear, biological, chemical or radiological devices.
“TRIA, as currently constructed, neither includes nor excludes NBCR events,” RIMS noted at the time.
Insurance covering terrorism is available, CHES Special Risks president Douglas Everett told Canadian Underwriter earlier.
“Clients need a framework or a coverage provision that allows them to cover additional security costs, allows them to relocate their employees, who are being affected by the event, allows them to retrain their employees if they don’t want to stay at their location … maybe move to another location” Everett said at the time.
“In keeping up with insurer needs, reinsurance is adapting to the evolving nature of terrorism and striving to close gaps in existing coverage,” Guy Carpenter said in its release Jan. 5, 2017. “In addition, new technologies, big data and predictive analytics, coupled with the ‘sharing’ economy will continue to present both challenges and opportunities for insurers in the year ahead.”
In its January 1, 2017 renewal report, Guy Carpenter reported “the decline in reinsurance pricing moderated at the January 1, 2017 renewal across most classes of business and geographies, as compared to the past three renewal seasons.”
Guy Carpenter added the insurance linked securities market had a “dramatic movement in pricing during the fourth quarter,” with decreases as high as 30%.
“While catastrophe bond issuance in the first quarter of 2016 made it the most active first quarter in the market’s history, second quarter catastrophe bond issuance fell to its lowest quarterly level since 2011,” Guy Carpenter stated. “In response to this diminished pipeline, catastrophe bond providers responded with greater flexibility in coverage and significant decreases in price.”
In a separate release Sept. 8, 2016, Aon Benfield reported that 24 catastrophe bond transactions closed during the year ending June 30, with a total limit of $5.2 billion, compared with US$7 billion during the year ending June 20, 2015.
“After remaining fairly stable in 2015, dedicated reinsurance capital increased by 5 percent from January 1, 2016 to January 1, 2017 as calculated by Guy Carpenter and A.M. Best,” Guy Carpenter said Jan. 5, 2017. “The Guy Carpenter Global Property Catastrophe Rate-on-Line index tracking property catastrophe pricing fell 3.7% at January 1, as compared to close to 9.0% a year ago.”