December 4th, 2012

Global Unrest and Political Instability Prompts Reevaluation of Terrorism Risk and Coverage

Posted at 11:30 PM ET

The dramatic rise in political instability and civil unrest across the globe, including uprisings in the Middle East and protests in Greece and Spain, has triggered a significant shift in the nature of terrorism risk and has highlighted the need for tailored terrorism and political violence protection, according to a new report on global terrorism and the terror reinsurance market, “Tensions Building: the Changing Nature of Terrorism Risk and Coverage,” released by Guy Carpenter.

The report showcases the increasingly diverse and dispersed nature of global terror threats, shifting to softer targets with attacks and plots becoming more localized. Although there has been a general decline in the number of terrorist attacks over the last five years, which peaked at more than 14,400 in 2006, the instances of these events remain at historically high levels.

The Terrorism (Re)Insurance Market Today

On a per risk basis, Guy Carpenter estimates that approximately USD2.5 billion of capacity for terrorism and sabotage coverage is currently available in the facultative reinsurance market. Although there is an abundance of capacity in the market, due to the absence of a recent major terrorism loss, heightened global volatility has caused a spike in the frequency of localized or territory-specific losses. Nevertheless, the increase of loss frequency in the facultative market has not yet affected the general market. Instead, the report indicates that changes to capacity and pricing can be expected primarily at the local level.

The Evolving Risk and Changing Nature of Coverage

The scale and damage caused by recent global unrest has also prompted a reassessment among risk carriers on how terrorism-related risks and coverages are defined. The report warns that terrorism coverage is often incorrectly believed to cover all violent human acts resulting in property and business interruption losses. In actuality, these 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.

The Future of TRIPRA and Implications for the (Re)Insurance Market

In the United States, speculation over the future of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) continues to weigh heavily on the (re)insurance market. The act is currently due to expire on December 31, 2014, and there is considerable uncertainty at this time over whether the program will be renewed. If TRIPRA is not extended or is substantially modified, many policyholders may be left to self insure the entire risk or portions of the risk. In turn, any future terrorist acts could have a negative impact on U.S. economic activity.

David Flandro, Managing Director and Global Head of Business Intelligence, said, “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. 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, Guy Carpenter is well positioned to structure and secure effective terrorism and political violence coverage protection for our clients.”

Click here to read the full report >>

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