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
The unrest around the world outlined earlier in the report has begun to impact the terror (re)insurance market, not only with regard to supply and demand but also in terms of how risks and coverages are defined. Although there is an abundance of capacity in the market due to the absence of a recent major terrorism loss (resulting in a stable to softening treaty terrorism market), civil unrest and/or riot coverages in some international terrorism programs are impacting several carriers. Indeed, the dramatic increase in global unrest has caused an increased frequency of localized or territory-specific losses in the facultative reinsurance market.
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. Capacity for the broader political violence coverage varies depending on world events and losses within specific territories. As loss activity increases and pricing subsequently rises, capacity is attracted to the territory. Nevertheless, the recent increase in loss frequency in the facultative market has not yet affected the general market and we do not currently anticipate general market hardening. We instead have seen changes to capacity and pricing at the local level.
Impact of Recent Global Unrest
The scale and damage caused by the recent global unrest has prompted a number of direct market participants in several countries and regions to broaden the coverage they purchase to mitigate any potential gaps. Coverage trends, however, have varied by country and region. Rather than take a one-size-fits-all approach, (re)insurers are increasingly evaluating coverage needs on a per territory or per region basis.
The unrest occurring in the Middle East and North Africa has led to a change in coverage purchasing behavior. As the nature of events in the region continues to change, a number of (re)insurers are reassessing their overall protection. While strikes, riots and civil commotions are typically included in an all risks policy, larger scale political upheavals, including events categorized as insurrection, civil strife, rebellion, revolution coup d’état, mutiny and war are only covered by the specialist political violence market.
The volatility in the region has therefore led to increased demand for political violence cover as carriers are looking for comprehensive cover to ensure that claims will be dealt with effectively and swiftly. Recent events in countries such as Tunisia and Egypt have illustrated how situations can rapidly escalate from those categorized by (re)insurers as strikes, riots and civil commotion to full political violence events. By purchasing full political violence coverage, (re)insurers have a broad spectrum of cover, meaning protection is provided regardless of how the event is defined. The result has been a more restrictive market in some Middle Eastern and North African countries.
Loss history and incorrect interpretations of terrorism coverage in the past have also emphasized the importance of understanding the subtle differences in coverage. In Israel, for example, the attacks by Hezbollah were classed as war losses by the government rather than terrorism losses. The market, however, did stand by its own view and indemnified these losses under the terrorism wording.