While state-run pools take much of the terrorism reinsurance burden, there is a specialist market growing within Lloyd's. Katherine Blackler looks at how well the risks of terrorism are understood and what 2010 may bring
Over the last decade, the Lloyd's terrorism market has grown from a handful of specialist war and terror underwriters into a fully mature and competitive market that is continuing to expand.
Looking at average loss ratios for terrorism results over the last decade, the average as a class appears to sit below 10%, making the market tempting for new players.
While terrorism is already a competitive market for (re)insurers, developments in the last 18 months demonstrate that a belief still exists in the market that there is room for more players. Aspen, Ace, Sagicor, Canopius and Argenta are just a few of the new providers to have entered the terrorism market in 2008-9, while sources tell Reinsurance that more are expected to join the fold this year to write the more difficult risks.
Andrew Stuart, head of terrorism and political risks at Cooper Gay, notes that greater risk awareness concerning terrorism is constantly pulling new business into the market, allowing it to expand. He says: "Even in the more vanilla territories, growing awareness from banks and other lenders that terrorism is not automatically covered in the all-risk section and wide concerns arising from corporate governance issues keep a steady stream of new enquiries coming into the market."
Stuart adds that not all insurers with terrorism risk on their books will look to reinsure: "An overseas insurer writing a domestic risk in a region considered a particularly benign area as far as terrorism is concerned may well be tempted to charge for - and retain - that risk for its own account. Yet an insurer in a high-risk area is almost certain to seek reinsurance. In the past decade, we have also seen reinsurers seeking retro cover on certain risks."
Some believe that the future will not be all plain sailing for terrorism underwriters. Steve Hatton, a broker in UIB's non-marine and energy division, believes that Lloyd's specialist terrorism markets will face increased competition from (re)insurers writing more terrorism cover as part of their normal policies. He says: "With few losses in recent years, many markets are seeing the benefits of writing terrorism within their all-risk placements in order to win business."
Terrorism is unpredictable but some regions have greater exposures than others.
Jonathan Wood, global issues analyst at the Control Risks Group, believes that the threat posed by fundamentalist Islamist terrorists has changed a great deal since 2001. "In the years leading up to 2001, planning was more centralised in al-Qaida's leadership. Since then, a combination of increased homeland security and military pressure in Afghanistan has decreased its ability to plan attacks centrally. The threat is now more diverse and localised, stemming from individuals or groups of radicals working autonomously rather than as part of a global terrorist enterprise."
He continues: "Better security precautions and pressure on al-Qaida has reduced the scope for large-scale, spectacular attacks like the events of 11 September, 2001, although extremists undoubtedly continue to pursue them. The deterioration in finance, training and capability in terrorist groups is driving them towards softer targets such as hotels, sporting events and shopping areas."
Wood notes that, in 2010, he believes that some of the strongest threats will come from the Arabian peninsula and West Africa: "At the moment, attention is firmly focused on the Arabian peninsula, an area that has been ground zero for many terrorist groups. In the last couple of years, there has been a tactical re-evaluation. The merger of the Saudi and Yemeni branches of al-Qaida could be the beginning of a much more sustained string of attacks, with Western oil companies, expats and energy infrastructure being popular targets.
"A widespread criminal economy is emerging in West Africa that may be linked to the Latin American drug trade, facilitated by militant and terrorist groups. Radicalisation in the area is an increasing problem; there is a lot of essentially ungoverned space that could provide a haven for extremism. West Africa could become an area for particular concern for oil and gas companies in 2010 although it remains unclear how it will develop."
The unpredictable nature of terrorism and the human factor can make technical underwriting a challenge. Sean Mooney, chief economist at Guy Carpenter, says: "From an analytic perspective, terrorism poses a major problem because it is caused by human agents, who can change their activities in response to counter-terrorism measures."
Russel Kennedy, war and terrorism underwriter at Brit, notes that it is this very unpredictability that makes risk managers and insurers want to purchase (re)insurance cover. "Terrorism is a growing issue for everyone. Over the last eight or nine years, the global threat of terrorism has increased and its unpredictable nature means that people will continue to purchase cover."
Advances in technology and the development of specialist analysis systems have made terrorism underwriting easier in the last few years. Hatton explains one example: "Region is one of the most influential factors for underwriters, not only at country level but within each country, where there could be huge differences between locations in the north compared with the south. Underwriters now have specialist analysis systems that can keep them up to date with activities in most regions of the world and they will always take this into account when pricing a new risk."
A growing problem?
In recent years, loss ratios for terrorism have been low; we are in a soft part of the cycle despite the recent attacks in Russia, Pakistan and India and the attempt to bomb a plane over Detroit on Christmas day. A catastrophic event or a number of larger attacks could completely remodel the market, though.
Fiona Denton, head of the war and terrorism team at Tysers, believes that claims from recent events will begin to swing the market: "The number of serious attacks seems to be increasing and therefore the claims will begin to impact adversely on profitability and so swing the market from its current soft cycle into a harder one."
Nevertheless, Kennedy does not believe that we will see large-scale rate increases this year. "At present, there is a lot of talk of a flat market in 2010 but this will totally depend on the account and how its business is underwritten."
Terrorism analysts do not all agree that the risks of terrorism for (re)insurers are increasing. There are arguments that the risk has not necessarily risen but rather that greater awareness of the problem that has helped to grow the market.
Wood does not believe that the risk of terrorism is necessarily higher and thinks that this can still be an extremely profitable line of business for (re)insurers. He says that, after a decade of heightened terrorism alert, companies are more discerning: "They're more willing to reject investors that display poor risk management, that make their assets more vulnerable to damage from terrorist attacks and that, ultimately, are more likely to claim for avoidable losses."
While companies may be more aware of the risks of terrorism and therefore be putting safeguards in place accordingly, there is no denying that it is still a risk for all businesses. Stuart says: "The fascinating thing about terrorism is the unpredictable human factor. Analysis of the political mood of the people in a region, despite what some will say, is still not a science and like the weather can change overnight. With the US and allied forces' war on terror continuing, the main players could see further attacks on their homelands. The stark fact is that terrorism is a modern fact of life and can strike anywhere at any time. At least those with foresight have taken cover."
Mooney concludes that, while terrorism is not necessarily a growing problem, all (re)insurers need to look carefully at their potential exposures to terrorist threats: "We would not regard terrorism as a major issue for insurers and reinsurers, though recent terrorist events like Mumbai continue to keep insurers and reinsurers on high alert."
Acknowledged terrorism risks for 2010
Philippines - Elections are due in the Philippines in May. Election-related violence, including small-scale bombings in Manila, is likely to increase.
Indonesia - The twin bombings of the Marriott and Ritz Carlton hotels in Jakarta in July 2009 indicate a greater dispersal of bomb assembly capability and an increase in attack co-ordination. Attacks on hotels and entertainment venues catering for westerners are likely in 2010.
Russia - Home-grown extremist nationalist groups pose a threat to foreign assets and expatriates in major Russian cities. The assets most at risk in 2010 are suburban shopping centres and street markets, public transport and central public squares in Moscow and St. Petersberg.
Colombia - The consistent downward trend in the number of terrorist attacks reversed in 2009. Drug trafficking gangs will probably become more heavily involved in extortion-related bombings in 2010.
Pakistan - In 2010, there will probably be an increase in terrorism attacks across Pakistan, especially as militant groups within Fata and groups in Kashmir and Punjab increase their tactical co-operation. This will also put India's major cities at risk of attack from Pakistan-based militants.
Kenya - Somalian jihadists will likely attempt at least one terrorist attack across the border in Kenya. The risks will be highest for tourist hotels, government buildings and transport hubs. Similar assets in Ethiopia and Djibouti are also at heightened risk in 2010 from the same jihadist groups.
Algeria - Algerian-based al-Qaida is likely to attempt a major, high-profile bombing in Algiers in 2010. Yemen and Saudi Arabia are also at increased risk of bomb attacks from al-Qaida in 2010. Source - Executive Analysis Foresight 2010
- Top 100 Insurtech: Quarter four update
- Charles Taylor bolsters liability team by hiring senior sextet from Vericlaim
- Gallagher Bassett acquires claims management firm
- Roundtable: Is a single customer view taking off in insurance?
- Finch and ICB owner on acquisition trail with sight set on €500m revenue by 2022
- Insurtech diary: Getting stuck into insurance
- Analysis: The mystery of the missing Insurance Fraud Taskforce report