Terrorism (re)insurance: achieving resilience

02 May 2018

The nature of the terrorist threat has continued to evolve in the two years since JLT’s last terrorism report. Virtually all attacks in the West during this period were carried out by lone wolves or small cells intent on causing civilian casualties rather than economic disruption. In addition to horrific loss of life, however, a number of businesses have been caught up in the fallout after being forced to close for prolonged periods despite a lack of direct physical damage. Small and medium-sized enterprises (SMEs), in particular, suffered significant (and often critical) financial losses as a result.

Further terrorist attacks in the West are almost inevitable as foreign fighters return home following the loss of so-called Islamic State (IS) territory in Syria. Combined with an empowered al-Qaeda (AQ) re-emerging from the shadows, businesses of all sizes are confronted with serious challenges from Islamic extremism. The threat from nationalist/separatist groups, right-wing extremism and other political and ideological grievances that motivate the agenda of extremists should also not be underestimated. And the outlook is set to become even more diverse and complex as cyber and drones add to the array of possible terrorist attack vectors, the range of credible chemical, biological, radiological and nuclear (CBRN) scenarios broadens and a degree of strategic leverage elevates otherwise simplistic attacks. Whilst the predominant trend of recent years has been towards smaller-scale attacks that target people, the risk of catastrophic events has not gone away.

Now more than ever, businesses are looking to the terrorism insurance market to mitigate the broad range of threats they face. With property damage no longer necessarily the primary loss driver, the limitations of traditional terrorism products have been exposed as they require a physical damage trigger to pay out claims. In response, specialty insurers have developed new, broader coverages that include loss of attraction, active shooter and cyber. Long-held definitions have also come under review as some recent attacks have blurred the distinctions between terrorism, malicious acts and workplace violence. As a result, pressure is building on the terrorism reinsurance market to provide new solutions for these dynamic primary carriers. This is compelling reinsurers to broaden risk appetites and adopt new approaches to account for the complexities that the new threat landscape brings. The role risk advisers play in developing sophisticated modelling and analytics tools, and communicating their results to risk carriers, will be crucial in bringing about this change.

The progress made by the marketplace so far represents a major step forward in narrowing terrorism protection gaps. But more needs to be done. Specifically, capacity for new forms of cover in the private market continues to be relatively modest when compared to more conventional terrorism risks. Perhaps even more importantly, awareness of these new products needs to be extended beyond large corporations familiar with the intricacies of the insurance market. Brokers again have an important role to play here: robust economic resilience to terrorism will only be possible if accessibility is extended to the SMEs that are increasingly being caught up in attacks.

State terrorism pools are also likely to be crucial in facilitating this. Pools have a unique opportunity to increase penetration and better position economies to recover from future attacks given their scale and influence in the market, along with the direct distribution channels they have built. Certain pools have already taken bold steps to narrow protection gaps by extending coverages to include new risks such as cyber and non-property damage losses. Over time, this could stimulate further competition in the private market and increase the supply of new forms of cover as more primary and reinsurance carriers offer additional capacity to meet building demand.

 

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