December 17th, 2012

Evolving Risk and Changing Nature of Coverage; Terrorism Coverage and Related Wordings

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President, Lucy Dalimonte, Senior Vice President, Ellen Rieder, Managing Director and Emma Karhan, Senior Vice President
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Since the devastating terrorist attacks of September 11, 2001, the (re)insurance sector has focused primarily on the potential for similar attacks in major metropolitan areas around the world. The threat posed by transnational terrorists, and al-Qaeda in particular, has dominated (re)insurers’ approach to terrorism risks. However, as described in Section 1 of this report, the nature of the terrorist threat has evolved in recent years. The core al-Qaeda group has been weakened by the deaths and arrests of several key leaders and improved counter-terrorism strategies. These developments have hindered al-Qaeda’s ability to launch spectacular attacks in the United States and other Western nations and prompted regional affiliate groups to independently strengthen and increasingly target Western interests around the world.

The evolution of al-Qaeda’s organizational structure has coincided with a dramatic rise in political instability and civil unrest around the world. The Arab Spring protests across much of the Middle East and North Africa have changed the political landscape of the region. This has created opportunities for militants to target Western interests in some countries. There is also considerable concern about the ongoing war in Syria and its implications on terrorism activity in the country and the wider Middle East region.

Unrest is also rife elsewhere. In Europe, widespread protests in countries such as Greece and Spain have been fueled by low economic growth and high unemployment, often resulting in violence. Combined with other recent loss-generating events in other parts of the world, including the miners revolt in South Africa and anti-Japanese protests in China, (re)insurers are increasingly re-evaluating their approach to terrorism risks. In such an unstable environment, carriers are now asking what is terrorism, what should terrorism policies cover and what are the likely scenarios they should respond to?

Terrorism Coverage and Related Wordings in the Market

Companies with global operations have a number of options when insuring against acts of terrorism. The standalone terrorism insurance market can offer insurance in countries where the insured’s risks are located (subject to certain country limitations), countries deemed to be high-risk and/or countries where terrorism insurance is required for real estate by a financial lender or a mortgagee.

However, the definition of terrorism can differ from country to country, meaning there can be gaps in cover for insureds and reinsureds. Risks faced by companies vary geographically and are not limited to terrorism as defined under most insurance policies. Events that are generally described as terrorism could be considered war, civil war or another political violence peril.

Political violence policies (which include terrorism and sabotage) are designed to respond to a broader class of perils and can provide the following coverage:

  •  Act of terrorism
  •  Sabotage
  •  Malicious damage
  •  Riots, strikes or civil commotion
  •  Revolution, rebellion, insurrection
  •  Mutiny and/or coup d’état
  •  War and/or civil war

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