Lack of capacity and demand hindering terror market expansion: GC

The changing terror risk landscape, underlined by an increased focus on “mass casualty and fear-inducing” events, suggests a need for greater capacity and a different approach to the peril, according to Guy Carpenter Managing Director, Charles Gibbs, and Vice President, Jamie Russell.

“There has been a major shift in the focus of terror attacks towards mass casualty and fear-inducing events, and away from physical damage. Yet, terrorism pools are built primarily to address catastrophic damage, while the private market is also geared towards managing this increasingly frequent but minor component of the loss,” said Gibbs.

In recent times the terror risk landscape has changed dramatically, with events occurring across Europe, ranging from vehicles being used as weapons to bombings and knife attacks.

In light of the evolving landscape insurers and reinsurers are faced with new challenges to create affordable and effective solutions that meet the needs of clients.

“We are, however, seeing the emergence of more relevant coverage, designed to address non-physical damage-related losses such as loss of attraction, denial of access and active assailant and shooter.

“The issue is more that capacity is limited, and while the threat potential is growing, terrorism remains a specialist market. The challenge is not so much the diversity of cover, but rather the scalability and distribution,” said Russell.

According to the reinsurance broker’s Gibbs, the lack of scale is driving an imbalance in the marketplace, with the terror risk sector leaning heavily towards larger-scale corporations over smaller businesses, which could also benefit from terrorism protection.

Gibbs, expands on this point; “Limited capacity is driving a much greater market focus on corporates simply because they can generate a better premium return. We must work out how to expand the terrorism insurance remit to companies that lack the financial ballast to ride out the shorter-term.

“The small number of players offering terrorism cover significantly heightens the potential for accumulation risk if efforts were made to push cover into the wider market. At present, there simply isn’t the incentive to extend out to the SME sector.”

However, as seen with other emerging and large-scale perils, a lack of modelling surrounding terror is detrimental to the evolution of the sector, a point Russell expanded on.

“The models are limited by a lack of claims data especially for the more diverse covers now on offer. Development in this area will aid insurers with their portfolio management and unless this is addressed, coupled with modelling capabilities that can support improved frequency analysis, insurers will continue to be restricted in how far they can extend their insurance offering,” said Russell.

Adding to the challenges a lack of modelling drives, according to Gibbs, is a lack of sufficient market that is limited market expansion.

“To extend current modelling capabilities will require extensive R&D investment. To make that investment to scale-up the terrorism offering will require audible customer demand.  At present, we are not hearing the calls for cover, as many either do not sufficiently understand the threat, or do not consider themselves exposed to the peril.

“If we are to create a substantial terrorism market we must create the modelling acumen to support the industry’s efforts to shift from a reactive, opportunistic approach to providing cover to a more proactive one that extends beyond the larger corporates, while also working to raise awareness of the perils to stimulate appetite at the SME level.”

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