January 26th, 2017

Public Sector Risk Financing Perspectives – Terror Risk: Part I

Posted at 1:00 AM ET

emma-karhan-sm1Emma Karhan, Managing Director

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The (re)insurance industry should look towards closing the gap between economic and insured terror losses.

As the market continues to attract more capacity for terror risk, a shift in focus is required to achieve a better understanding of the far-reaching impact the terror peril has on economies in an increasingly connected world, beyond the direct physical impact and its ensuing business interruption. Simultaneously, the industry needs to proactively look for opportunities where private and public partnerships can work effectively to support the financial resilience of economies.

Since the terrorist attacks of September 11, 2001, many nations have created terror pools to address the failure of the industry to provide adequate insurance and reinsurance protection against terrorism. These pools emphasized providing catastrophic coverage for events that can potentially threaten economies. As the frequency of small events increased, the gap between insured and economic losses has grown, as most of the recent terror events have minimal insurance coverage. Over the last 15 years, the (re)insurance market has gained an increasing level of comfort and understanding of terror risk - as more capacity has been dedicated to the market, we have seen an “untraditional” supply and demand relationship - as the pricing index continues to decrease the proportion of oversupply of capital increases.

terrorism-pool-price

In the last seven years, the terror pricing index dropped by 50 percent, the number of reinsurers increased by 78 percent, the amount of capacity purchased increased only by approximately 30 percent, while authorized capacity has increased by approximately 40 percent.

Link to Part II>>

Link to Part III>>

Link to Part IV>>

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