Reinsurers Reassess Terrorism Risk
A new report examines how terrorism risk has changed in the decade since the 9/11 attacks.
Insurance Networking News, August 15, 2011
In the decade since 9/11, the risk that that terrorism represents for insurers has continuously shifted along with the geopolitical winds.
A new report from Guy Carpenter & Company, finds that while recorded incidents of terror around the world remain at historically high levels and terrorism remains a serious risk to the (re)insurance industry, the industry continues to meet the current demands for terrorism risk transfer.
Indeed, the report estimates that the supply of terrorism remains abundant, with between $6 billion and $8 billion of terrorism capacity currently available in the U.S. private market. Moreover, a great deal of capacity resides in the government-backed programs originally created by the Terrorism Risk Insurance Act of 2002 (TRIA). 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 Abbottabad, Pakistan that killed Osama bin Laden, the recent attack in Norway and the simmering political unrest across the Middle East, the report notes that the terrorism threat is forever evolving as groups adapt their tactics to counter-terrorism measures and global events.
Guy Carpenter & Company’s Head of Terror Risk Specialty, Paul Knutson, says 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,” Knutson says.
While the three major modeling companies – AIR Worldwide, EQECAT and Risk Management Solutions (RMS) – all have worked to refine and updated their terrorism modeling methodologies, quantifying the economic, insured and human losses from a terrorist attack continues to pose major challenges for reinsurers. “Compared with natural hazards such as hurricanes and earthquakes, the underlying analytics supporting terrorism risk management are still in the early stages of their evolution,” Knutson 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.
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