The global insurance and reinsurance industry should look towards closing the protection gap in terrorism risks, where economic impacts continue to far outstrip insured terror losses.
Capacity remains abundant for terrorism reinsurance coverage but the market needs to shift its focus, according to Emma Karhan, a Managing Director with a specialism in terror risks at broker Guy Carpenter.
“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,” Karhan explained in a recent article.
At the same time as looking afresh at how it provides terror coverage and what specific exposures it is looking to protect against, the insurance and reinsurance industry also needs to look to work alongside public entities in order to support the economic resilience to terror risk of countries around the world, Karhan said.
The creation of terror risk insurance pools has helped countries to gain coverage against attacks on their soil, but now that the reinsurance market has ample capacity it could be time to push some of that risk back to private markets.
Capacity for terror risks has increased steadily, as Karhan explains and shows in Guy Carpenter’s .
“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.
“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,” Karhan wrote.
Some of this pricing decline has been driven by reinsurers need and desire to diversify outside of property catastrophe risks, with terrorism an attractive area for them as a result.
However, Karhan notes that this growth of capacity which has not happened alongside an increase in our understanding and modelling of terror events, has not resulted in a better product yet and has largely gone to supporting the terror insurance pools, or focusing on the established areas of terror loss that are understood.
As a result the terrorism re/insurance protection gap has been widening, and Karhan hints that perhaps a driver of this is the sector’s lack of progress on understanding and insuring the more modern terror risks.
“The (re)insurance industry still focuses on physical triggers for economic-driven losses and looks to insure huge concentrations of risk rather than looking at the far reaching insurable bounds of impact by losses in a service driven economy,” she explains.
Due to the “increasing interconnectivity and contingencies between various sectors of the world’s economies” that Karhan highlights, the size of potential economic losses from terrorism is growing, widening the gap and requiring a fresh approach from re/insurers to develop products that can address this issue.
Reinsurers can provide solutions that could help to address this gap, with parametric type terrorism insurance triggers one possible solution. With capital and capacity abundant and the world facing evolving threats, it seems the industry has an opportunity to become more proactive in covering terror risks.
