Emil Metropoulos, Senior Vice President
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We excerpt here from the recently published Marsh report: Terrorism Risk Insurance 2010, the section authored by Guy Carpenter’s Emil Metropoulos.

Commercial insurers are strongly supportive of the Terrorism Risk Insurance Act of 2002 (TRIA), as it provides them an ultimate safety net for their terrorism exposures. However, the residual risk for terror events retained by insurers below the triggers and retention levels set by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), coupled with the relatively high cost of reinsurance in key exposure zones, means that insurers remain cautious about terrorism exposure. As a result, they continue to avoid accumulating high-profile urban exposures.

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Guy Carpenter’s Director of Reinsurance Market Management, Chris Klein, spoke at a recent Organization of Economic Cooperation and Development meeting focusing on terrorism. Guy Carpenter’s (re)insurance industry report “Terrorism — Reinsurers Standing By,” was released in conjunction with the meeting. He presented a wide-ranging overview of how the reinsurance industry weathered the recent global financial crisis.

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Despite an ever-changing terrorism risk insurance market, businesses from every industry sector continue to purchase coverage - more than 60 percent of organizations surveyed by Marsh bought coverage in 2009.

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David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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As the terrorism threat has evolved, the (re)insurance industry has reacted and adapted. Certainly, the terror reinsurance market has changed significantly since 2001. Activity and pricing levels have generally fallen since the peak that occurred following the attacks of September 11, 2001 due to the absence of a major loss and supply/ demand imbalances. Regional differences exist, however, with activity in the United States clearly down while other markets have remained steady.

A recent Guy Carpenter & Company, LLC survey of reinsurance underwriters improved our understanding of the terrorism reinsurance market. The findings were consistent with our beliefs and offered additional insights that are significant and encouraging. 

The dynamic nature of terrorism requires a different underwriting approach, and Guy Carpenter will continue to offer advice and solutions to help insurers manage their terrorism exposure.

Terrorism - Reinsurers Standing By, Part I: Introduction »

Terrorism - Reinsurers Standing By, Part II:  Risks, Threats and Exposures »

Terrorism - Reinsurers Standing By, Part III: Terror Reinsurance Market»

Terrorism - Reinsurers Standing By, Part IV: Terrorism Analytics and Rating Agency Requirements »

Terrorism - Reinsurers Standing By, Part V: Conclusion

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Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office:  1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC.  MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies.  This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.   

David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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This series has shown that terrorism remains a constant and real risk. Although more
effective counter-terrorism measures have frustrated al-Qaeda’s ability to plan largescale attacks since the events of September 11, 2001, global recorded terror incidents are at historic highs. The emergence of individuals or autonomous groups aligned to the aims of al-Qaeda continues to threaten the developed world, especially as insurgents are able to operate in unstable countries such as Pakistan and Yemen.

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David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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To support the process of managing and underwriting the terrorism peril, (re)insurers
are increasingly using tools to analyze the risk. The dynamic nature of terrorism, and
the uncertainty in identifying the targets and frequency of attacks, requires a different
approach to manage the risk.

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David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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Terror reinsurance markets have generally trended downward in activity and overall pricing since peaking during market conditions following the attacks of September 11, 2001 in 2002-2004. The dynamic being played out in the terrorism reinsurance market is not unlike other low-frequency, high-severity lines where a combination of the passage of time, the lack of further market defining loss events and constrained reinsurance budgets converge to allow the market to drift gently downward from supply/demand imbalances. On the surface, it would seem that lower pricing over time would increase activity levels, but interestingly we see simultaneous lower prices and lower activity levels.

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David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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The threat posed by terrorism has changed significantly since the catastrophic events of September 11, 2001, but it remains a constant and serious risk with global recorded terror incidents at historic highs. The nature of the risk is wide-ranging, with many countries threatened by international groups and domestic terrorism. Certainly, the threat posed by fundamentalist Islamic terrorists has changed a great deal since 2001. For insurers with terrorism risk on their books, it is important to understand how the terrorism threat has evolved, the varying risks in different regions and what developments are likely in 2010 and beyond.

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David Flandro, Head of Global Business Intellience and Julian Alovisi, Senior Vice President
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As we approach the ninth anniversary of the September 11, 2001 attacks, the threat from terrorism continues to pose a risk to the (re)insurance industry. The nature of the threat has changed since 2001, but terrorism remains a constant and serious risk with global recorded terror incidents at historic highs. Terrorist organizations operating in unstable countries present a danger to the world, and the recent flurry of terrorist activity serves as a reminder that individuals and groups remain a serious threat.

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AIR has not implemented major changes to its terrorism model since 2007. In 2008, RMS implemented a number of changes in its Probabilistic Terror Model, PTMv2.7. The latest updates to both AIR and RMS terror models are provided below.

AIR U.S. Terrorism Model

In September 2007, AIR, updated its damage functions to include the impact of reflected pressure waves following a conventional bomb blast - following two years of research. Earlier models had only taken account of incident pressure waves. Reflected pressure is always greater than incident pressure by a factor of up to 13X, depending on the density of the area in question. In general, this change to include reflective forces has lead to an increase in projected property losses by city.

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