July 29th, 2014

Uncertain Future: Evolving Terrorism Risk, Executive Summary

Posted at 1:00 AM ET

The threat from terrorism has undergone significant change since the attacks of September 11, 2001. Heightened and more effective counter-terrorism activities in the following years have prevented repeat attacks on the scale of those carried out in New York and Washington D.C. Nevertheless, al-Qaeda and its affiliates, along with individuals inspired by the movement, still pose a significant threat to Western interests around the world as events over the last 18 months have shown.

The first successful major attack on US soil since September 11, 2001 occurred a year ago in April when two bombs exploded near the finish line of the Boston marathon (1). Individuals inspired by al-Qaeda also carried out relatively low capability attacks in other Western countries in 2013, including the United Kingdom. Furthermore, attacks on the In Aménas gas facility in Algeria and the Westgate shopping mall in Kenya’s capital of Nairobi in 2013 showed that groups are still capable of launching destructive and sophisticated attacks on commercial entities given the opportunity.

Although there has been a significant increase in the number of terrorist attacks and fatalities around the world over the past five years, evolving capacity and the absence of a major terrorism loss for reinsurers have resulted in a softening terrorism reinsurance market in areas with less perceived risk. This reflects the wider reinsurance market’s environment of having adequate capacity and, for some countries, the presence and support of stable terrorism pools that are designed to mitigate the withdrawal of (re)insurance capacity following significant terrorism events. Reinsurance buyers that have purchased terror cover in these countries have consequently benefited from rate decreases and improved terms and conditions in some instances, depending on where and what they write.

However, the US market continues to be challenged by the uncertainty over the potential expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) on December 31, 2014. Concern remains that non-renewal or substantial changes to the Act could lead to the withdrawal of terrorism coverage in the United States. The ramifications could also impact terrorism pools around the world. One possible outcome if TRIPRA is not renewed could see other pool structures coming under pressure to dissolve, resulting in fragmentation towards a more open market approach.

A recent study carried out by Guy Carpenter concludes that the (re)insurance sector does not have the capital necessary to withstand certain high loss scenarios that involve nuclear, biological, chemical or radiological (NBCR) weapons. For example, a nuclear bomb detonated in Midtown Manhattan in New York City produces a modeled loss of approximately USD900 billion (assuming a 100 percent take-up rate for NBCR terrorism cover).

The uncertainty over TRIPRA’s future was evident during the first five months of 2014 as several workers compensation renewals with sizeable employee concentrations in large US cities changed carriers and in some cases moved into the residual market. Should TRIPRA expire without a replacement or is materially changed, further capacity shortfalls would likely occur in large US urban areas that have the greatest need for coverage. Increased pricing would inevitably follow. Some form of federal backstop is therefore needed if the private (re)insurance market is to continue to provide capacity to higher risk areas.

Given a number of insurance carriers continue to rely on TRIPRA to provide the terrorism insurance limits they currently offer, Marsh and McLennan Companies (MMC) and Guy Carpenter strongly support the reauthorization and modernization of the Act. The bipartisan agreement to reauthorize TRIPRA for an additional seven years as proposed in the US Senate in April 2014 is therefore a welcome development. MMC and Guy Carpenter continue to lobby for TRIPRA’s renewal in an effort to prevent disruption to the US terrorism marketplace and ensure a stable insurance environment for the economic recovery to continue. We will keep clients, prospects and markets informed of all significant renewal developments throughout the year.

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Note:

1. While the Boston bombings have not been classified as an act of terrorism under TRIPRA’s requirements, President Barack Obama described the event as an “act of terrorism.”

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