Charles Gibbs, Managing Director and Jamie Russell, Vice President
- Capacity a major limiting factor in expanding remit
- Small number of players raising aggregation risk
- Cover not reaching organizations that need it most
Restricted capacity, limited modelling capabilities and a lack of demand from smaller organizations are severely hampering the industry’s ability to generate a substantial terrorism market, according to Charles Gibbs, Managing Director, and Jamie Russell, Vice President, at Guy Carpenter.
“There has been a major shift in the focus of terror attacks towards mass casualty and fear-inducing events, and away from physical damage,” explains Gibbs. “Yet, terrorism pools are built primarily to address catastrophic damage, while the private market is also geared towards managing this increasingly frequent but minor component of the loss.”
“We are, however, seeing the emergence of more relevant coverage, designed to address non-physical damage-related losses such as loss of attraction, denial of access and active assailant and shooter,” Russell explains. “The issue is more that capacity is limited, and while the threat potential is growing, terrorism remains a specialist market. The challenge is not so much the diversity of cover, but rather the scalability and distribution.”
This limited scale is creating a market imbalance, adds Gibbs, with the sector heavily weighted towards larger-scale corporations, rather than smaller businesses that could benefit most from terrorism cover.
“Limited capacity is driving a much greater market focus on corporates simply because they can generate a better premium return. We must work out how to expand the terrorism insurance remit to companies that lack the financial ballast to ride out the shorter-term,” he says.
Yet, for this to happen, the market has to evolve beyond its specialty origins, or run the accumulation gauntlet. “The small number of players offering terrorism cover significantly heightens the potential for accumulation risk if efforts were made to push cover into the wider market,” Gibbs continues. “At present, there simply isn’t the incentive to extend out to the SME sector.”
Restricted modelling capabilities on the terrorism front remain a stumbling block to this evolution. “The models are limited by a lack of claims data especially for the more diverse covers now on offer,” Russell says. “Development in this area will aid insurers with their portfolio management and unless this is addressed, coupled with modelling capabilities that can support improved frequency analysis, insurers will continue to be restricted in how far they can extend their insurance offering.”
Market expansion is also hindered by a lack of demand. “To extend current modelling capabilities will require extensive R&D investment,” Gibbs believes. “To make that investment to scale-up the terrorism offering will require audible customer demand. At present, we are not hearing the calls for cover, as many either do not sufficiently understand the threat, or do not consider themselves exposed to the peril.”
“If we are to create a substantial terrorism market,” he concludes, “we must create the modelling acumen to support the industry’s efforts to shift from a reactive, opportunistic approach to providing cover to a more proactive one that extends beyond the larger corporates, while also working to raise awareness of the perils to stimulate appetite at the SME level.”
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