Terrorism Cover Remains Stable, But Subject to Change

NU Online News Service, Aug. 9, 1:32 p.m. EDT

Coming up on the 10th anniversary of 9/11, terrorism insurance remains stable, but availability and affordability could be affected should there be a catastrophic event that reduces capacity, according to a report from Guy Carpenter.

The reinsurance broker, a subsidiary or Marsh & McLennan Companies, today released its 18-page report, “Terrorism: Terror Market Continues To Provide Abundant Cover,” saying available capacity “remains abundant.”

Capacity in the United States is estimated to stand somewhere between $6 billion and $8 billion, Guy Carpenter says. However, the report notes that a portion of the capacity remains available through the Terrorism Risk Insurance Act of 2002 (TRIA), providing a government backstop to acts of terrorism.

On a global basis, there is $9 billion of capacity, with an additional $2 billion of excess capacity authorized but not assigned.

Despite the capacity, the report continues, reinsurance pricing has begun to flatten out after years of downward movement.

David Flandro, global head of business intelligence says in a statement, “Since the catastrophic events of Sept. 11, 2001, global terrorism has had a profound impact on the (re)insurance market. Although the nature of the threat is very different today from what it was 10 years ago, terrorism remains a constant and serious threat. It is forever evolving as terrorist groups and individuals adapt their tactics to counter-terrorism measures and global events.”

The report notes that while acts of global terrorism peaked in 2006, at more than 14,400, acts of terrorism “still remain at historically high levels at more than 10,000 in 2010 alone.

Due to its unpredictable nature insurers and reinsurers struggle to quantify the risk.

“The human element means the nature of the threat is forever changing as groups relocate and adapt their tactics in response to counter-terrorism measures,” says the report.

The cost of terrorism insurance is “predominantly driven by the supply/demand equation” rather than sophisticated underwriting unlike natural perils. While that may lead some to assume pricing would decline, the capacity is affected by other capacity events. The reason is that reinsurers pool the capital in a pool for low-frequency, high severity catastrophe claims.

The catastrophe events of 2010 and 2011 have depleted some of that reinsurance capital. Depending on events on during this Atlantic hurricane season, reinsures could see capacity reduced even further.

Capacity has not changed over the past five years, the report goes on to say, and is “not expected to change in 2012, barring major events or very strong currency movements,” the report says.

However, supply of terrorism insurance could be affected in the near-term by the potential “for further knock-on effects from additional major global natural-peril catastrophe losses.”

As for TRIA, talk of cuts to the program has given way to “more pressing financial matters” and it is not expected to become an issue until its expiration in 2014.