Evolving risk dynamics, along with a highly competitive market environment, have been the two key drivers of change in the terrorism (re)insurance marketplace over the last couple of years. Although the class has been highly profitable during this time, broadening coverages and growing underlying exposures have increased attrition.
The terrorism market has a strong record of adapting to the evolving nature of the risk. Policies in the standalone market were originally created to respond to physical damage and resultant business interruption losses arising out of acts of terrorism committed for political, religious or ideological purposes, including the intention to influence governments and/or put the public in fear for such purpose. Capacity remains plentiful today for these more conventional risks. Specialty insurers are now seeking to differentiate themselves from the competition by offering new, broader coverages that better reflect today’s prevailing threat and potential gaps in existing policies.
Figure 6 on page 14 outlines some of the additional coverages insurers are now offering. This demonstrates how the market has continued to innovate by expanding the scope of cover to protect against new risks and lower-level losses. Extensions such as prevention of access, for example, protect against outcomes similar to those that followed the London Bridge attack, when businesses in nearby Borough Market were prevented from accessing their premises for nearly two weeks. Other new offerings such as loss of attraction and active shooter go further by protecting against loss of income and third-party liabilities. Loss of attraction is drawing considerable attention given that it compensates businesses for loss of revenue following attacks, even if they have not been physically impacted. Active shooter policies, meanwhile, provide protection against property and liability losses following gun and knife attacks.
Even risks associated with more complex, systemic and potentially catastrophic incidents such as CBRN and cyber can be covered by standalone terrorism policies. Traditionally the domain of several state terrorism pools, private capacity for CBRN has become more widely available in recent years. Products for cyber are also being developed, albeit with some difficulty given the way risks cut across traditional lines of business. Capacity within the terrorism market is widely restricted to cyber-enabled property damage, with 14 solutions for non-damage risks often found in the specialist cyber market. Whilst this fits neatly into pre-existing frameworks (the approach traditionally adopted by the sector, often to the frustration of buyers) more sustainable and client-friendly solutions need to be found for the long term that do not involve restrictive exclusions. Given the broad risks and potential limits involved, state pools are playing an increasingly active role in offering coverage for cyber terrorism, although questions remain around the attribution and certification of specific attacks and whether acts that cause financial (rather than physical) damage will be covered. The boundaries of cover are only likely to become clear after a major cyber terrorism loss.
Definitions in the standalone market have also come under scrutiny as carriers have sought to develop the protection they offer. As alluded to earlier, the definitions of perils are becoming increasingly blurred as the range of threats widens. Whilst distinctions between terrorism, malicious acts and workplace violence are necessary from a policing, justice and
governmental perspective, insureds want coverage clarity and claims certainty, regardless of motive. The financial (and emotional) impacts are ultimately the same. As a result, some insurers have moved away from strict definitions and now offer malicious act cover that does not seek to draw a distinction between whether an event was a terrorist attack or not.
All this is supported by advice around crisis management, response consulting, counselling and brand and reputation impacts.
Figure 6: Selection of Additional Terrorism Coverages Available Today
Loss of Attraction
Covers loss of Profit to the assured at the named location
Leagal Expenses and settlement costs resulting from action against the insured after a terrorism-related event
Active Shooter/Malicious Attack
Cover responds to attacksthat cause bodily injury and involve deadly weapons (no physical damage trigger is required)
Covers non-physical damage business interruption as a result of a direct or indirect threat
Coverage triggered by defined terrorism perils and related to cyber attacks
Cover for actions perpetrated by organised crime groups such as cartels in Latin America
Chemical, Bilological, Radiological & Nuclear (CBRN)
Coverage responds to attacks involving chemical, biological, radiological and muclear materials (for damage and non-damage risks)
Loss of revenue and additional costs to an assured as a result of an act or threat of terrorism that leads to the abandonment or relocation of an event
(Source: JLT Re)
This is an impressive array of new products that have come to market in the last two to three years. However, important limitations have hampered the flurry of innovation, on both the supply and demand sides. These new coverages are typically sub-limited and only relatively small limits are currently being offered (compared to more conventional terrorism risks). This, in part, relates to problems around the awareness and accessibility of these products; whilst capacity is adequate for current levels of demand, most companies continue to purchase traditional coverages at a time when their limitations are most apparent. In fact, the attacks that have occurred in the West over the last year or two have only served to highlight gaps in traditional terrorism insurance coverage.
Table 2 (See below) shows the ten most costly terrorist attacks since 1990 in terms of insured losses. The bomb attack at Brussels airport in 2016 is the only event in the last 17 years to make the list. It is no coincidence that a significant component of the Brussels loss was related to property damage and ensuing business interruption.
In addition, much of the original thought (and wordings) for new coverages has been confined to a small number of specialty carriers. Whilst these companies are able to offer bigger lines for new forms of cover, others have more limited appetites. A clear pecking order is being established in the terrorism market as a result, differentiated between a select number of carriers that are leading the innovation drive, and those that are following.
Wordings can vary substantially by market, creating confusion over the breadth of cover on offer. New products are also drawing close scrutiny from cautious reinsurers, although risks to date have been largely retained by primary carriers due to low loss experiences and relatively muted uptake (compared to conventional risks). The corollary of all this for buyers is the need for expert advice in securing the best coverages in the market.
This need for expert advice is especially true for SMEs. Whilst most large corporations have risk managers on hand to oversee the insurance buying process and create disaster recovery plans for acts of terrorism, many smaller businesses, especially those located outside city centres, do not. In fact, fewer than 5% of small businesses in the UK are estimated to have terrorism insurance policies. This is often due either to a lack of risk awareness or to a perception that the cost of cover is too expensive. In both respects, this is not the case – the threat is no longer confined to central business districts and competitive pressures have driven the cost of protection down in recent years.
Business interruption costs often disproportionately affect smaller firms as closure can threaten the sustainability of the business. Coverage that protects against an increasingly broad spectrum of threats and facilitates the swift payment of claims is therefore imperative to maintaining cash flow. Unfortunately, a number of SMEs that purchased cover were left badly exposed by recent terrorist attacks given that most (traditional) policies require a physical damage trigger to pay out claims.
Specifically, the issue of non-damage business interruption revealed considerable gaps in terrorism insurance coverage as several businesses were preventing from accessing their premises for extended periods of time even though their properties had not suffered any physical damage. These SMEs were therefore denied much-needed compensation and the (re)insurance market was at the receiving end of some adverse media coverage as a result. A small number of ‘good grace’ payments made to businesses without requisite protection, whilst well intentioned, ultimately added to the confusion about what was and was not covered.
The sector needs to learn from this and react accordingly. Ultimately, SMEs want easily understandable policies that indemnify losses quickly, whether there is physical damage or not, and whether incidents are attributed to terrorism or not. Failure to address these issues could damage the industry’s reputation. Whilst the process of creating new products to counter evolving risks is of course pivotal, more needs to be done around marketing, distribution and educating SMEs to help build terrorism resilience. Making these products accessible to SMEs is crucial to the solution. Global terrorism pools, often ‘go to’ markets for smaller businesses, are therefore looking to step in and support the market by exploring options to extend coverages to include non-property damage losses (more on this later).
STEPPING UP TO THE PLATE
Demand for new forms of cover could therefore grow significantly, assisting insureds and carriers alike and making economies more resilient to future attacks. Intermediaries (as well as risk carriers), particularly those working with SMEs at regional levels, have an important role to play in raising awareness about the new terrorism products available (and their competitive costs), as well as the comparative limitations of traditional coverages. Businesses can then be satisfied their cover is fit for purpose whilst simultaneously ensuring resilience is fostered and a tested crisis management plan to mitigate impacts from attacks is implemented.
Figure 7 charts how increased take-up could impact the market. As awareness of these coverages grows, more capacity will be required, forcing other primary and reinsurance carriers to catch up with the small number of innovators that have led the charge so far.
Product development in the terrorism reinsurance market, to date, has generally lagged that seen in the primary market as appetites have been largely restricted to the narrowing pool of non-complex standalone terrorism treaties. Indeed, recent losses to impact the terrorism reinsurance market, such as the riots in Mexico and the bombings of a desalination plant in Yemen and of Brussels airport, show that capacity continues to be geared towards covering traditional terrorism risks (i.e. property damage).
Figure 7: Terrorism Market Penetration
Traditional coverage is well taken up by insureds and well supported by the insurance and reinsurance markets. New broader cover has only been taken up by a relatively small number of insureds, supported by a more limited number of insurers. As take-up of new cover increases, the point of the spear will embed deeper into the market, meaning more primary and reinsurance carriers will be needed.
As stated, this has stemmed in part from issues of awareness as relatively modest take-up rates for some of the new coverages in the primary market have seen insurers retain the risk. But this is now changing and pressure is increasingly building on reinsurers to provide solutions for the more dynamic primary carriers. New approaches will need to be adopted to account for the complexities that the new threat landscape brings. This is likely to include the reassessment of treaty retentions to reflect new loss patterns. Changes to event definitions will also be required given that those currently being used were not created to deal with new perils and their associated loss scenarios. Additionally, questions around cyber are not going away and primary carriers are increasingly seeking solutions from reinsurers that offer protection against both terrorist and malicious events.
Stasis is not an option for reinsurers. A definitive response to the complex needs of primary carriers is now required, especially as a growing number of state pools offer (or are considering offering) protection against cyber and non-damage business interruption losses. Whilst contingency aggregations are likely to be challenging, this could be offset by higher pricing. And significant progress is being made in the modelling and analytics space to help carriers assess and mitigate the new terrorism landscape.
THE ROLE OF ANALYTICS
With (re)insurers uncertain of aggregations or potential losses, analysts must up their game to provide certainty, confidence and relevance. Policy triggers and deductibles must be fit for purpose and a deeper understanding of the peril, its impacts and imaginative use of modelling techniques can support this.
For conventional risks, far greater sophistication and precision is possible. This is being delivered to JLT clients as our tools and expertise help bring greater clarity to risk managers and release of capacity for insurers. Sunstone™, JLT’s proprietary terrorism risk model, is continuously evolving to provide increasingly sophisticated analytics with greater efficiency and clarity. Cityscape modelling offers cutting-edge precision. And whilst absolute certainty around probability and consequence are not possible for some of the newer and more novel risks, this should not exclude educated assessments which provide a meaningful benchmark from which to position risk appetite – “too difficult” or “inadequate data” is not good enough.
JLT is leading the way by working closely with clients to better understand and model loss of attraction. Innovative techniques are also available to address active assailant. Different analytical approaches are being adopted to provide clients with a holistic, integrated view of risk, creating efficiency of modelling resource and considering combined scenarios for evaluation. As a result, JLT clients are benefitting from greater clarity and accessibility of analysis, along with more articulate communication and interaction, culminating in a meaningful consultative, advisory service that adds value. Dashboard interfaces have supported this; but deep knowledge of the peril, consultative engagement with clients and interpretation of analytics through advisory remain crucial.
Certainly, increased coordination and collaboration between the private market and state pools will be a crucial factor in the future provision of terrorism (re)insurance. There has long been an argument for government involvement in providing solutions for terrorism risk. After all, most state pools were set up to support the private market in offering cover against acts of terrorism and prevent the withdrawal of (re)insurance capacity after such attacks. (See Appendix for a list of state terrorism pools that currently operate around the globe.) As a result, they have traditionally provided backstops for catastrophic events, particularly for perils where systemic risks lie.
This has largely been their purpose since their respective creations, and the existence of governmental backstops remains imperative given that private market capacity alone may not suffice to cover (for example) catastrophic CBRN events in large cities. During the Terrorism Risk Insurance Program Reauthorization Act’s (TRIPRA’s) last renewal in the United States, the backstop for conventional weapon coverage was scaled back whilst being maintained for CBRN. Tellingly, the programme was subsequently broadened to include cyber. Pool Re in the UK has likewise announced that its cover will now include physical damage (and resultant business interruption) from cyber terrorism.
In order to successfully protect economies against new methods of attack, the remit of some pools is changing to focus more on localised resilience. As mentioned earlier, a number are exploring the possibility of offering protection against non-damage business interruption losses. This is being done by broadening the scope of cover so that policies no longer require a property damage trigger to pay claims. Given their scale and influence in the market, and the unrivalled direct distribution channels they have built, pools are uniquely placed to increase penetration, particularly amongst SMEs outside large urban areas. Importantly, the UK Government confirmed in March 2018 that Pool Re will soon be permitted to cover non-damage business interruption losses (subject to parliamentary approval).
Increased pool involvement is likely to stimulate further competition within the standalone market and generate additional capacity for new forms of protection. And for the pools that purchase retrocessional cover, a significant amount of risk is being passed back into the private market. For example, Pool Re’s recently announced retrocession programme included cyber terrorism, mirroring what is available in much of the private market. By partnering with academia to push modelling boundaries, the use of advanced analytics was highlighted as a crucial factor in alleviating markets’ concerns around aggregation – proof, if it was needed, that it can be done.
Over time, improved modelling will play a crucial role in encouraging considerably more standalone market participation for all terror-related perils, thereby potentially allowing state pools to step back to being ‘carriers of last resort’ once again and pushing taxpayers further away from potential losses.
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