With interest rates low and government bonds even lower, financial times have been tough for insurers and reinsurers alike. Intelligent Insurer asked five chief financial officers from some of the biggest companies in the industry about the challenges they’re facing.
The impact of terrorism on the insurance industry today should not be underestimated. According to Terrorism Tracker, a collaborative project between Aon and The Risk Advisory Group, terrorism incidents affect businesses globally twice every day.
The fact that this is a global issue is significant. Look back 10 to 15 years and terrorism risk was mostly focused in specific geographical areas.
“There were issues such as inter-tribal fighting in places like Colombia and Sri Lanka, for instance,” says Ed Winter, senior terrorism underwriter for Markel.
“We knew what we were targeting as underwriters, but since so-called Islamic State and Al-Qaeda and Bush’s War on Terror, terrorism targets are everywhere and anywhere. Belgium, Paris—as a terrorism underwriter, it’s very difficult to deal with and to understand.”
“The market has been slow to respond and the fallout from several recent attacks has reinforced the need for new products.” Paul Upton, JLT Re
Chris Holt, head of credit, political & security risk consulting at JLT Specialty, agrees that the picture has become much more complex and unpredictable. Commenting on the launch of JLT Re and JLT Specialty’s joint viewpoint report, Rising to the New Terror Challenge in March this year, he said: “Terrorism has evolved into a more complex threat for businesses and insurers, with attacks and fatalities both seeing steep increases since 2011.”
But this isn’t just about an increase in activity, he added. “The rise of Islamic extremism, combined with the potential access to weapons, explosives and toxic materials, comes at a time when modern communications and technologies are being exploited by groups as recruitment tools, communication channels and potential attack vectors. This means today's terrorist threat is more dynamic with impacts that are difficult to predict accurately.”
There is indeed a frightening randomness to the new face of terrorism: backpack bombs, lone-wolf attackers with grenades and guns, car bombs—how can an insurer accurately assess this type of risk?
According to Aon’s 2015 white paper, The Changing Face of Terrorism, “bombings remain the most likely form of terrorist attack globally—accounting for 52 percent of terror incidents in 2014—but armed attacks are becoming more common, accounting for 30 percent of global terrorism incidents in 2014”.
Property is no longer the only exposure at risk from terror attacks. Civilian casualties are the primary target, increasing the focus on liability and casualty exposures. Retail and transport topped the list of targeted industries in 2014.
“In locations where there is an increase in local threat levels, employers should consider reviewing security and the training tools available to educate their people. Without preparation there remains the potential for liability and casualty claims in the event that the worst should happen,” states Aon’s white paper.
As security gets a lot stronger in countries in the US and Europe, property damage losses are diminishing, agrees Winter. “The bigger issue is the business interruption losses—and if a lone wolf is going in with a gun, it’s more loss of life they are targeting rather than damage to buildings.”
When it comes to business interruption, the insurance industry has huge power to create resilience in the face of terrorist attacks. When terrorism strikes, with whole chunks of the city can be shut down, but insurance—especially backed by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA)—can create the confidence needed to keep businesses thriving in areas that may be considered targets.
On April 15, Democrat Senator Chuck Schumer delivered a keynote address to the Independent Insurance Agents & Brokers of America in which he highlighted how terrorism insurance has spurred economic growth in downtown New York after 9/11—despite many predictions that “southern Manhattan would become a ghost town”.
Schumer noted: “Not only do we have more jobs today in the tech industry in downtown New York, but people are starting to come live there—all because of terrorism insurance,” he said.
He emphasised the importance of TRIPRA in making this possible.
“In most instances, you need both business and government to work well together, and terrorism insurance is one of them,” Schumer said. “This idea that we don’t need the government to be a backstop in certain areas is impractical.”
Understanding the threat
The global terrorism picture is changing all the time, but one commonality is that the threat is not going away any time soon.
The proliferation of bombings and shootings around the world means that the likelihood of a major terrorist attack is set to remain high, according to JLT.
Paul Upton, partner, marine, energy & political risk, JLT Re, says: “Clearly all of this has implications on the provision of terror re/insurance cover. The market has been slow to respond and the fallout from several recent attacks has reinforced the need for new products.
“We are working with a number of market participants to deliver new and innovative products in this area. This can be done through the development of holistic solutions or, what is more likely in the short term, a suite of products that plug existing gaps.”
While terrorism has become increasingly unpredictable, there some clear quarters from which the threats originate.
Scott Bolton, Aon’s director of business development and network relations within crisis management explained in Aon’s 2015 white paper that European and North American businesses face exposure to two distinct sets of potential attackers: returning extremists and home-grown radicals.
“The first set comprises those returning from conflict zones, Syria in particular, and tend to be in tune with the broader strategic aims of groups such as so-called Islamic State and Al-Qaeda,” the paper said.
They often have combat training or experience and some may possess bomb-making skills, but they are also more likely to be on the radar of security services upon their return. The Kouachi brothers who attacked the offices of Charlie Hebdo in Paris fall into this category.
The second group comprises “those who have been self-radicalised by extremist ‘jihadi’ literature online”, says Bolton. While they tend to be less capable than returning extremists, with limited training and strategic capability—often resorting to attacks using vehicles and weapons immediately to hand—they are also more likely to have flown under the radar of domestic security services.
Bertrand Nzohabonayo, who attacked French police with a knife in December, wounding three before being shot dead, falls into this category.
While this much is understood, pinpointing where attacks may flare up is more complicated.
As Winter explains, it’s not a simple matter of deciding that the same level of threat exists throughout a particular city or region.
“Some places can be appealing holiday destinations at the same time as having trouble in certain areas—that’s what we have to understand. The best approach is to recognise, for example, that the threat may lie in the business district and not in other areas.
“It’s about understanding why the terrorists hit certain areas, and what the targets really are.”
There are other questions, too, such as whether terrorists will gain access to nuclear weapons or develop serious cyber capabilities.
The bottom line is that, now more than ever, terrorist underwriters need the very best specialist security advisers to help them get their cover right.
“At Markel we work to sure we have the right security advisers,” says Winter. “It’s not always easy to get what you need—they have had to evolve, they have to get into close contact with the relevant security sources within governments, have contacts on the ground who understand issues such as what people are protesting about and why. These are things we don’t necessarily read about in the papers.”
Terrorism Risk, Aon, The Risk Advisory Group, Markel, JLT, Insurance, Reinsurance, US, Europe, Cyber