The issue of terrorism has been forced back into the news agenda with the deaths of three of the leaders of the of Jihadist terror organisation al-Qaeda including leader Osama bin laden. Hafidz Baharom examines the issues facing the region’s reinsurance market over the threat of terrorism and the rising exposure levels...

September 11, 2001 was, what Americans will always call, a day of infamy. 3000 people were killed, 2000 were injured and countless more were later found to have developed medical issues from the dust and debris. The cost to the reinsurance industry was significant and prompted a global hardening of insurance reinsurance rates globally.

May this year saw the United States finally ending its hunt for Osama bin Laden, leading to his death in Abbotabad, Pakistan.

Malaysian reinsurer  Best Re said while bin Laden’s death may trigger retributory attacks, companies should not over react to the risk. It explains to date, there has been no indication that such a threat is higher than usual except for in one or two territories.

According to a survey by Guy Carpenter last year, the factors driving terrorism reinsurance pricing depends on its relationships  to other terror programs, perceived prevailing terror risk levels and what markets will bear in terms of cost.

 A market survey of reinsurance underwriters published in the same report stated that 80 per cent of reinsurers were actively seeking new or expanded terror transactions, showing an imbalance between supply and demand in the marketplace.

Standalone terrorism covers have decreased over time. This is allegedly due to other priorities for the reinsurance budget or targets spend, such as natural disasters which are now considered predictable. Also, the passage of time since the last major terror strike also plays a factor. This, however, seems to emanate more from the US market instead of being a global trend.

Geographically discrete opportunities seemed to be a preference for reinsurers. According to Guy Carpenter, however, the term ‘discrete’ was by definition dependent on how some underwriters viewed country-specific governmental terror pools as an ideal example of capacity deployment while others preferred to focus on insurers that only operate in a certain region of any given country.

Many nations have taken proactive steps towards ensuring that the cost of terrorism is covered and underwritten. Such can be seen with the establishment of the UK’s Pool Re, Austria’s  Terrorism Pool, Belgium’s TRIP, France’s GAREAT, Germany’s Extremus Versicherungs-AG, the Dutch NHT and even Spain’s Consorcio de Compensacion de Seguros; Spain of course being the most proactive nation having enacted their law since 1964.

In a publication by Willis in April 2009, these plans were listed out and considered categories such as whether the program was a fully or partially funded by governments, was the coverage mandatory, were there limits applicable and even if biological, nuclear and chemical attacks were covered. Most of these coverage plans provided require both government and private sector direct insurers and reinsurers to pool together their funds.

Nations such as Belgium and Germany have created a mandatory reinsurance pool. Netherlands decided to make it free, while other nations such as the United Kingdom (Pool Re), the United States of America (TRIA) and even France (GAREAT) have combined both national funds and reinsurers to create a pool of funds that should be able to cater to the claims and underwritings should a terrorist act occur. Even then limits were placed totalling an average of €1 billion per nation, with perhaps the United States, France and Germany having over average pools of funds of US$100 billion, €2.2 billion and €10 billion (on annual aggregate basis) respectively.

When asked if governments should prepare for a national bailout of reinsurers in case of terrorism acts, Best Re insists that it is too early for government intervention although such a scenario should be prepared for nations with higher risk, such as Pakistan.

It must be noted that nations with higher threats of terrorism in Asia and Africa are not even close to having such a pool. Indonesia, being the largest Muslim nation with a secular government, had to deal with the backlash of the Bali bombings. While Australians have a national reinsurance agency which covers terrorism, the Indonesians have no such coverage. In Asia, the only nationalised terrorism coverage pool was established by India in 2002, called the India Market Terrorism Pool, which has a pool with coverage of up to Rs 7.5 billion, including material and property loss or damage.

The report also highlighted the increasing coverage of NBCR (nuclear, biological, chemical and radioactive) threats. While this surprised Guy Carpenter, many reinsurers preferred to take a clear underwriting position to avoid that sub-category of the terror peril. However, the analyst does admit that the security of NBCR capacity hinges on the question of price, not merely availability.

Arguments against having such pools are naturally due to the nature of terrorism itself. Even now, a nation such as America under the Obama administration is already contemplating the removal of protection and subsidies for reinsurers affected by terrorism. Even France using their GAREAT has since lessened the government’s funds. While these are all affects tied in with economic recession and government policies to lessen debt, again, the nature of terrorism requires constant vigilance.

Broker Aon has issued its annual risk map  and say in the current climate political violence, strikes, riots, civil war and war threaten the sustainable growth, continuity and profitability of businesses as much as terrorism.

It has reach such a level that, for the first time in its ten-year history, Aon’s annual Terrorism Threat Map now also takes these factors into account in assessing the severity of threats businesses face around the world.

Unsurprisingly the 2011 map shows increased risk of political violence in the Middle East and North Africa, reflecting the significant turbulence of the Arab Spring uprisings in the region.

The broker said: “The risk of coup d’etat and rebellions in Africa reflect a continent that presents a significant political violence risk. Meanwhile, terrorism continues to severely afflict established conflict zones like Iraq, Afghanistan, Pakistan and Somalia as well as parts of Nigeria and the Sahel region. The threat of occasional acts of international terrorism remains significant for most Western nations and major powers.” 

The map is produced by the broker in collaboration with the security consultancy firm Janusian, which is part of The Risk Advisory Group.

Dr. David Claridge, managing director of Janusian, says:“The threat of terrorism remains a daily concern for business risk managers. Islamist terrorist groups continue to pursue a global agenda, illustrated by plots such as Al-Qaeda in the Arabian Peninsula’s attempt to bomb cargo planes last October last year as well as internationalising local grievances by attacking targets like Moscow’s Domodedovo airport, which was bombed in January.

“The uprisings in the Middle East and North Africa have highlighted the need for risk managers to take a comprehensive approach by assessing exposure to political violence in all its forms.”

Neil Henderson, head of terrorism in Aon Risk Solutions’ Crisis Management team, adds:“While the attacks of September 11 were the genesis for the Aon Terrorism Threat Map, the issues that should be of most concern to people and businesses have evolved greatly in the nearly ten years since. While terrorism remains a very real threat around the world, the reality is that threats to business continuity are also coming from political violence in all its many forms. The change in the way the map is scored should not be seen as a decrease in the incidence or severity of terrorist threats, but rather the fact that it provides businesses with a more inclusive view of some of the risk management issues they are facing around the world.

“As the insurance market for terrorism insurance is very mature and can cope with complex international risks, it should be considered as part of a sound risk management program.”

David Austin, Chief Executive of Dubai based MGA Visionary Underwriting Agency, one of just five Lloyd’s coverholders in the Emirate says clients are becoming increasingly confused and concerned.

“The biggest problem at present is that there seems to be a great deal of confusion from clients as to what is and is not covered.

“We have been increasingly seeing claims from policyholders on policies for events which are not covered by the policy against which they are claiming.”

He said the issue remains how the events which have occurred in recent months can be defined.

“The events we have seen could be described as political violence but cannot be seen as terrorism,” says Austin. “The problems started really with the protests in Thailand last year where the government decreed that the violence in Bangkok was terrorism rather then political violence.

“We have clients which have been making claims on their Strike, Riot and Civil commotion coverages but can the events in Libya and Egypt be seen as any of the above.”

He said he has been told of  a claim for over $26 million from a business in Egypt which is now in dispute with the underwriters purely down to the definition of the events leading up to the resignation of the country’s President and the move towards future elections.

“The result has been a demand for an all encompassing political violence coverage which has left the market with a real problem to meet the demand for such a broad level of coverage at a time and in a region where there has been and remains significant unrest.”

Mr Austin adds that prices should be rising but there remain certain markets which are chasing coverage at seemingly any cost.

“Those in the market here are aware of which market is driving the competition,” he said, “Where we were getting 0.3 last year it is now 0.2 or 0.175. What makes the situation worse is that you could in some ways equate a reduction in premium if there was a greater level of risk retention and higher deductable but we are see deductibles which last year were $100,000 now being lowered to £25,000.

“It is unsustainable and we cannot offer pricing to our markets at those levels with the breadth of terms and believe that it is sustainable in any real way.

“I have been writing political risks and terrorism for more years than I care to remember and I have never known a market like it.”