September 4th, 2014

US Terror Risk Sector Capacity

Posted at 1:00 AM ET

Despite this increase in terrorism market capacity, it is not sufficient on its own to provide comprehensive terrorism cover in the United States. According to a Guy Carpenter (re)insurance capital study, dedicated global capital to the US (re)insurance market is estimated to be approximately USD700 billion (1). Catastrophe models that produce nuclear, biological, chemical or radiological (NBCR) event scenarios estimate losses from a large nuclear attack in Manhattan (at greater than USD900 billion) would likely exceed the total amount of capital in the US market (see figure below). The study consequently concludes that the (re)insurance sector does not have the capital necessary to withstand such a scenario. Some form of federal backstop is therefore needed if the private (re)insurance market is to continue to provide capacity to higher risk areas.

All Charts_Graphs Final Edits

Should the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expire without a replacement, insurers that have the option are likely to select where to deploy their terrorism capacity and will do so at preferred locations and price. In this scenario, reinsurers would also only provide additional capacity at their price, meaning capacity shortfalls would be likely in key urban areas as well as workers compensation accumulations generating significant modeled losses relative to surplus.

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Note:

1. It is important to note that not all capital is dedicated to or capable of writing terrorism coverage.

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