August 21st, 2014

The Terrorism Reinsurance Market

Posted at 1:00 AM ET

Despite the recent spike in terrorist-related activity, 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. Although localized terrorism and political violence activity has impacted certain facultative programs and affected pricing and capacity at the local level, adequate terrorism capacity continues to be available in the reinsurance treaty marketplace for certain countries and territories.

This reflects the wider reinsurance market’s environment of ample capacity due to low loss experiences, strong balance sheets and an influx of capital from alternative sources. Much of this alternative capital is being deployed in the US property catastrophe market, prompting reinsurers to move some of their capacity away from this business segment and into other lines. Recent reinsurance renewals have manifested this competitive environment and pricing has fallen notably across most lines of business.

Although the relative uncertainty associated with terrorism risk and the inherent challenges of terrorism catastrophe modeling has limited the extent of capacity being redeployed to the terrorism peril, some insurance companies that provide terrorism cover have benefited from falling reinsurance prices, depending on where and what they write. Moreover, some insurers have looked to further capitalize by pushing for improvements to terms and conditions, with cover for acts of terrorism being added to catastrophe excess of loss contracts in some instances. Terrorism pools that purchase retrocession cover have also benefited from rate decreases. Furthermore, there has been a notable trend towards multi-year deals as some pools have sought to take advantage of the competitive market.

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