The changing face of terrorism risk

Terrorism cover has changed rapidly in recent years. The nature of attacks has altered and buyers have been incorporating terrorism cover into whole account reinsurance. Here, Jessica Johnson of Barbican Insurance Group discusses trends in the market.

What have been the recent trends in terrorism reinsurance purchasing?
Over the last two to three years, one of the most significant trends we have witnessed in relation to terrorism reinsurance purchasing strategies has been the increase in buyers incorporating terrorism cover into whole account reinsurance, rather than buying standalone programmes.

Such solutions may include a broad range of covers, such as marine, hull, cargo, marine war, aviation war, etc, with some of the larger structures also including property, and terrorism reinsurance has simply been rolled into the package.

This is also the case in the insurance-linked securities (ILS) arena, where a number of structures are built on whole account programmes.

What impact have recent terror attacks had from a reinsurance perspective?
We have seen a clear increase in the number of terror attacks in recent years, but there has been a marked shift away from attacks aimed at causing major property damage to an increased focus on areas with high public activity that are designed to cause maximum casualties and loss of life.

This has significantly changed the insured loss profile of such events, resulting in greater economic fallout in the form of business interruption, denial of access and loss of attraction.

Although we are increasingly seeing a significant rise in the availability and purchase of insurance products designed to respond to these types of risks, the losses resulting from the spate of recent attacks have not been significant enough to impact the reinsurance sector.

However, the series of catastrophic hurricanes in the US and the wildfire in California, coupled with the earthquake in Mexico, have had what could be described as a secondary impact on the terrorism reinsurance market.

These losses have had a major impact on a number of whole account reinsurance programmes, with available cover significantly reduced as a result. What reinsureds are now acknowledging is that due to the scale of the direct impact on their programmes, they may now have insufficient remaining cover should there be a large-scale terror attack before the end of the year.

How do you expect this to influence discussions at the forthcoming renewals?
Expectations are that we will see a marked rate increase on lines that have been affected by these catastrophic losses, with indications that the events will serve to stabilise rating levels on other unaffected lines. From a terrorism reinsurance perspective, for reinsureds which have incorporated their cover into a whole account programme, it is likely that they will see a rate rise even if they have not experienced a direct loss.

We would expect that this will drive a number of buyers to rethink their terrorism reinsurance strategies and bring about a shift away from incorporating it into larger programmes in favour of purchasing standalone terrorism cover to ensure adequate sideways protections across all lines of business. The by-product of this is clarity of reinsurance cost and rate by class.

Jessica Johnson is underwriting manager, malicious acts at Barbican Insurance Group. She can be contacted at: jessica.johnson@barbicaninsurance.com

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