Terrorism re: still a nascent market

Businesses are currently preoccupied with concerns about pandemic risk, but it was not so long ago that risk managers were operating in an environment where the threat of terrorism was ever-present. Bermuda:RE+ILS asked readers about the state of today’s terrorism re/insurance market.

“These conversations echo similar discussions that happened nearly 20 years ago.”

Much has been said in recent months about pandemic insurance and the possible need for a government backstop to assist the industry in providing coverage for this unique risk.

These conversations echo similar discussions that happened nearly 20 years ago in the aftermath of the 2001 9/11 attacks. Then, the US government supported the development of the terrorism re/insurance market by passing the Terrorism Risk Insurance Act (TRIA). Today, many call for a similar solution to the problem of pandemic risk.

TRIA was designed to ensure terrorism coverage was available for risk managers concerned about the prospect of more such attacks, to ensure businesses were not put out of business by being in the wrong place at the wrong time.

Bermuda:Re+ILS asked readers for their thoughts about the market and, crucially, what role Bermuda can and does play in its future development.

Figure 1: How well positioned is Bermuda to be a leader in terrorism re/insurance?

Respondents were not significantly split between those who see Bermuda as a potential noteleader in terrorism re/insurance (43 percent) and those who see it as one of several jurisdictions that are well equipped to write this line of business (54 percent), without having a specific advantage (Figure 1).

Very few people thought Bermuda operated at a disadvantage, with only 3 percent of respondents indicating Bermuda lacks the skills to lead in this area.

It is worth digging a little deeper into this question. In an increasingly digital age business can be done anywhere, in theory, by a smart underwriter with good information and a computer. Yet centres of excellence continue to exist, as people with similar skills cluster together and knowledge and experience are shared.

Bermuda made its name as the global centre for catastrophe re/insurance. While it has traditionally specialised in catastrophes of the natural variety, such as hurricanes and floods, a terrorist attack like 9/11 2001 can cause destruction on a similar scale.

Is it too simplistic to regard terrorism as a form of unnatural catastrophe, that can be underwritten in a similar way to a hurricane? What are the similarities between terrorism risk and natural catastrophe risks, or others underwritten in Bermuda?

Figure 2: Are the skills required to underwrite terrorism risk similar to those needed to underwrite other risks written in Bermuda?

Dealing with the risk

Nearly a third of respondents stressed the considerable differences that exist between terrorism risk and other types of risks that Bermuda has experience in underwriting (Figure 2).

The world has come a long way since weather events were seen as Acts of God, utterly unpredictable and unfathomable in their behaviour and destruction. Today the world has an extensive network of weather stations and teams of scientists studying pressure patterns and other factors to help measure and mitigate weather risk.

Terrorism is quite different. The day may come when machine learning makes human behaviour as modellable as other risks, but for now the prospect remains in the realms of science fiction. Predicting terrorism attacks therefore remains very difficult, and therefore pricing insurance coverage extremely inexact.

Having said that, more than half of respondents (54 percent) said that while the skills needed to underwrite terrorism risk are different from those needed for other risks, there are also some similarities. It is clear that nobody can accurately model this risk for now, but few are better placed to try than re/insurers in Bermuda.

Figure 3: How attractive is the terrorism re/insurance business for carriers?

Who wants a slice of the action?

Just because Bermuda’s re/insurers may be better placed to take on terrorism risk than many others, that does not necessarily mean they want the job. So how attractive is this business?

More than half of respondents emphasised the challenges inherent in this business (Figure 3), but expressed some cautious optimism that things are slowly starting to change, perhaps driven by the considerable strides being made in technology, such as machine learning, which can make sense out of even the most chaotic-seeming patterns.

Just over a third of respondents were a little more optimistic than that, arguing it is already becoming an attractive business for carriers; 3 percent of respondents were willing to take that sentiment to the extreme and argue the business is already highly attractive.

More respondents (9 percent) felt comfortable at the other extreme, arguing the business is far too risky, making it positively unattractive for re/insurers.

Figure 4: How highly correlated is the uptake of terrorism insurance with incidents of high profile terrorist attacks?

The link to terrorist events

Business is always most attractive when demand is high, so for a product really to take off there needs to be a healthy supply of customers willing to pay for it. Challenges around modelling notwithstanding, if enough people want a product you can be sure there will be institutions developing products to meet that demand.

The majority of respondents saw some level of correlation between terrorism attacks and demand for terrorism insurance—but not too much (Figure 4). Just under half (48 percent) of respondents admitted terrorist attacks focus the mind and encourage businesses to seek terrorism insurance—just as has been seen in recent months with pandemic coverage following COVID-19.

These respondents saw the correlation predominantly existing in one direction, however—people are prompted to buy terrorism coverage by increased attacks, but are less likely to let their policy lapse because there have been no recent attacks.

A smaller number (43 percent) said there is some correlation between terrorist incidents and demand, but the emphasised the lag between cause and effect. This group may be more cautious about the prospects for future demand in a world that has seen fewer devastating and costly terrorist attacks than in the past.

Figure 5: How much growth potential do you see in terrorism re/insurance over the next five years?

The outlook

What are the prospects for this market over the medium term—say, the next five years? The majority of respondents do not expect to see much change in the market over that timeframe, with 62 percent predicting it will remain much as it is now (Figure 5).

Most of the remaining respondents see growth in the market, but not dramatic growth, with 31 percent predicting modest growth in the next five years.

Only 4 percent of respondents expect to see massive growth going forward—although the answer would probably change considerably if there was a significant attack, for the reasons mentioned above. The fact so few people expect massive growth from the market may imply that few people expect to see another event like 9/11 in coming years.

However, not many respondents expect the market to shrink, suggesting that while the expectation of a large terrorist attack is not necessarily there, few would rule it out.

Image: / MIA Studio

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September 2020

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