December 6th, 2012

Tensions Building; The Changing Nature of Terrorism Risk and Coverage: Executive Summary

Posted at 1:00 AM ET

The terrorism landscape has evolved in the 11 years since the attacks of September 11, 2001, in the United States. During this time, the core al-Qaeda group has been weakened by the death of its leader, Osama bin Laden, the effect of U.S. drone strikes in Pakistan and stringent counter-terrorism measures implemented in the Western world. Nevertheless, al-Qaeda’s ideology and threat remain. Major terrorist attacks have occurred in Indonesia, Madrid, London and India since 2001, and the emergence of strong and independent al-Qaeda affiliate groups in unstable regions of the world now poses a significant threat to Western interests.

In addition to the diverse and dispersed terrorism threat, there has been a dramatic rise in political instability and civil unrest around the world in recent years. Several countries in the Middle East and North Africa have seen violent uprisings, resulting in heightened political uncertainty. European countries such as Greece and Spain have also seen violent protests against a backdrop of depressed economic growth and high unemployment.

These developments have had a significant impact on the global terrorism (re)insurance market. Global unrest has triggered a growing need for civil unrest and riot coverages in some international terrorism programs. There has also been an increased number of territory-specific losses in the facultative reinsurance market, impacting local capacity.

The scale and damage caused by recent global unrest has prompted a reassessment among risk carriers of how terrorism related risks and coverages are defined. The definition of an “act of terrorism” can be open to different interpretations. Terrorism coverage is often incorrectly perceived to cover all violent human acts resulting in property and business interruption losses. It must in fact meet the definition of terrorism in order for coverage to apply. This has led to renewed interest in the broader political violence coverage for exposures worldwide as it provides comprehensive protection regardless of how the event is defined.

In the United States, speculation over the future of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) continues to dominate the country’s terrorism (re)insurance market. TRIPRA is currently due to expire in December 2014 and there is considerable uncertainty at this time over whether the U.S. Congress will renew the federal backstop. Should TRIPRA not be renewed, or if substantial changes are made to the program, it may impact primary commercial lines writers and their ability to provide the same terrorism insurance limits currently offered today. Without TRIPRA, some insurers could withdraw from geographical areas that have the greatest need for coverage or they may even exit certain lines of business, such as workers’ compensation. There will also be an impact on embedded terrorism insurance coverage, standalone terrorism pricing/demand for capacity and TRIPRA captive placements.

At this time of heightened global instability and uncertainty, Guy Carpenter remains committed to tailoring solutions to provide clients with the most effective terrorism and political violence protection. Guy Carpenter is additionally well positioned to structure and secure the best and largest amount of available terrorism reinsurance capacity for clients underwriting in the United States to help withstand any potential changes to TRIPRA.

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