June 15th, 2010

Terrorism - Reinsurers Standing By, Part I: Introduction

Posted at 1:00 AM ET

David Flandro, Head of Global Business Intellience and Julian Alovisi, Senior Vice President
Contact

As we approach the ninth anniversary of the September 11, 2001 attacks, the threat from terrorism continues to pose a risk to the (re)insurance industry. The nature of the threat has changed since 2001, but terrorism remains a constant and serious risk with global recorded terror incidents at historic highs. Terrorist organizations operating in unstable countries present a danger to the world, and the recent flurry of terrorist activity serves as a reminder that individuals and groups remain a serious threat.

Improved counter-terrorism measures and pressure on al-Qaeda has seen a reduced threat of large-scale attacks. The shift to softer targets such as transport networks and hotels saw lethal and costly attacks in Madrid, London and Mumbai. This is not to say al-Qaeda groups do not continue to pursue spectacular attacks. President Barack Obama recently said the biggest threat to security in the United States is the possibility of a terrorist group obtaining a nuclear weapon.

As the terrorism threat has evolved, the (re)insurance industry has reacted and adapted. Certainly, the terror reinsurance market has changed significantly since 2001. Activity and pricing levels have generally fallen since the peak that occurred following the attacks of September 11, 2001 due to the absence of a major loss and supply/ demand imbalances. Regional differences exist, however, with activity in the United States clearly down while other markets have remained steady.

A recent Guy Carpenter & Company, LLC survey of reinsurance underwriters improved our understanding of the terrorism reinsurance market. The findings were consistent with our beliefs and offered additional insights that are significant and encouraging:

  • More than 80 percent of reinsurers are actively seeking new or expanded terror insurance transactions, emphasizing the imbalance between supply/demand in the marketplace
  • Purchases of standalone terrorism covers have decreased over time largely due to pricing disconnects and lower perception of product need 
  • Reinsurers prefer geographically discrete opportunities
  • Two-thirds of markets are offering cover for nuclear, biological, chemical or radiological events, demonstrating a true evolution in underwriting appetite from the period following the September 11, 2001 attacks.

Governmental pools play an important role in the terror reinsurance market by providing insurers with a safety net for their exposures. The proposed cut in federal support for the Terrorism Risk Insurance Act of 2002 (TRIA)/Terrorism Risk Insurance Reauthorization and Extension Act of 2007 (TRIPRA) advocated by the Obama Administration in the United States threatens this safety net and has therefore been vigorously opposed by the insurance industry. Such a development, or a successful major terror attack, has the potential to shift the global landscape towards
a tighter market. However, the terror reinsurance market remains well placed to respond to the changing conditions.

The dynamic nature of terrorism requires a different underwriting approach, and Guy Carpenter will continue to offer advice and solutions to help insurers manage their terrorism exposure.

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