Terror cover deemed adequate despite threats

While recorded incidents of terror around the world remain at historically high levels and terrorism remains a serious risk to the insurance industry in the decade since the 9/11 attacks in the US a decade ago, the industry continues to meet the current demands for terrorism risk transfer, says Guy Carpenter.

Despite the changing nature of the terrorist threat and its unpredictability, the reinsurance industry, along with the myriad local government terror pools, continues to successfully provide adequate terror cover.

The terrorism reinsurance market has undergone significant change since it peaked in 2002-2004. The absence of major terror losses in subsequent years saw capacity increase, creating supply and demand imbalances and prompting a general decline in global terrorism-specific reinsurance pricing.

The report estimates that the supply of terrorism capacity remains abundant, with between US$ 6 billion and US$ 8 billion of terrorism capacity currently available in the US private market. Despite this excess capacity, the pricing of terrorism risk reinsurance has remained flat as the reinsurance industry looks to alter its depleted capital positions following the heavy natural catastrophic loss activity over the last 18 months.

Citing the still unknown repercussions from the raid in Pakistan that killed Osama bin Laden, the recent attack in Norway and the political unrest across the Middle East and North Africa, the report notes that the terrorism threat is continually evolving as groups adapt their tactics to counter-terrorism measures and global events.

Guy Carpenter’s Head of Terror Risk Specialty, Paul Knutson, says that this unpredictability presents a serious challenge to risk managers.

“The dynamic nature of terrorism, and the uncertainty in identifying the targets and frequency of attacks, requires a different approach to risk management and thus a different approach to transferring risk to the reinsurance market,” he says.

Accordingly, the company says the risk posed by domestic and international militant groups means terrorism is likely to remain a global security threat for the foreseeable future.