Spectrum of uncertainty

A high degree of uncertainty due to fluid circumstances in the Middle East are the latest in a series of challenges in terrorism and political risk management, says Marc Jones

For the terrorism insurance market 2014 has so far been something of a Curate’s Egg – good in parts, bad in others. On the one hand there have been no recent attacks in Western Europe or the USA. However, on the other hand the Middle East has seen the Syrian Civil War continue, whilst the fissures of political and sectarian division have dramatically widened in Iraq.

The terrorism insurance market has been doing its best to focus on recent developments and react accordingly. However, the first half of 2014 saw the unexpected and rapid rise of the Sunni terrorist group Islamic State in Syria (ISIS), which has now changed its name simply to the Islamic State (IS) and which now holds large parts of Eastern Syria and Western and North-West Iraq.
However, this development seems to have taken many people by surprise and it remains to be seen how it will influence the terrorism insurance market, as both Iraq and Syria are not at the moment countries with high levels of insurance cover due to past unrest.

“The recent rise of ISIS has not to our knowledge created losses in the market, but it has certainly focused the mind of underwriters,” Kerri O’Dwyer, political violence underwriter, political risks and contingency at Beazley Group, told us. “The placement of risks in the region has become more challenging in an area that already had limited capacity. The speed at which ISIS has managed to gain control of areas has surprised many. In addition the reach of their message through social media means the threat of ISIS worldwide (and not just in the Middle East) cannot be overlooked.”

Any increase in terrorist activity is obviously not something that the insurance industry likes to hear about. Although there have been a high number of relatively small attacks over the past decade, along with a number of attempted attacks that were stopped by various national security services, there has not been a major incident since the events of 9/11.

“The terrorism insurance market has been fairly flat since 2004,” says Will Farmer, senior underwriter, crisis management at Catlin. “Immediately after 9/11 there was an obvious spike. There was an increased focus from banks on property. However, as far up as the level of the boardroom, people’s memories can be quite short.”
Farmer points out that a number of country pools developed in recent years have relieved pressure on insurance cover. “In the past year there has been an increased focus on this in the USA, due to the Terrorism Risk Insurance Act. This is not a permanent act. It’s been extended a few times and is due to expire in December of this year. There’s still a lot of uncertainty [as to whether] it will be extended again. The US Senate has passed legislation on it, but it hasn’t passed the House yet.”

Unpredictability is not something that insurers like to see, for obvious reasons. And uncertainty over something as important as TRIA is not helpful. The political deadlock in the US Congress has led to a number of issues, including TRIA, stalling. In July this year, the US Senate voted to renew the act for another seven years on an overwhelming and bipartisan 93-4 vote. However, the House of Representatives did not vote on their own version of the same bill before they broke up for the Summer recess, despite widespread calls from insurers and business executives for the legislation to be passed as quickly as possible.

Ratings agency AM Best announced at the end of July that it was keeping a close eye on developments surrounding TRIA. AM Best said that while both the Senate and House bills mark substantial progress towards extending TRIA, there were still issues that remain to be addressed. AM Best said that while their introduction signals bipartisan support to extend the federal backstop, both bills increase the insurance industry’s liability. Further, it stated in a briefing note, that “neither provides a permanent solution of risk sharing between the private sector and the federal government for insuring terrorism risks”.

Although the extension of TRIA has bipartisan support, as this article was being written it remained to be seen if the House bill will be a priority when Congress reconvenes from its recess in September 2014. It also remains to be seen if the House bill will be altered in any way. Any suggested changes will need to be negotiated, which could take time – something that TRIA does not have a lot of at the moment.

The insurance industry will be watching any such negotiations carefully. In April, Marsh published its 2014 Terrorism Risk Insurance Report, which stated that: “Many property insurance policies in 2014 were endorsed with sunset clauses that cancel terrorism coverage effective December 31, 2014, if TRIA expires. According to interviews conducted by Marsh, approximately a third of property insurers will include full-term terrorism coverage for policies extending into 2015. And almost half of the property insurers surveyed indicated that they will not offer standalone terrorism coverage after TRIPRA’s scheduled expiration.”

Ongoing tensions

In the meantime, insurers are evaluating events unfolding in the Middle East. “The environment has changed a lot since 2004,” says Catlin’s Farmer. “Al-Qaeda has been substantially dispersed – it’s now hard for them to carry out an attack on the same scale as 9/11. Instead they’ve been carrying out small scale attacks, such as the 2008 Mumbai attacks and the Kenyan shopping mall attack last year.

“In the UK it’s been ten years since the IRA started decommissioning. There are still splinter groups out there, but terrorism risk has changed in the UK. Around the world risks have changed – we’ve seen ISIS rise, unrest in the Eastern Ukraine and so on. It’s all very unpredictable. Threats now vary depending on clients and assets. A client like a large US oil company might have a small office in New York but have substantial assets in the Middle East.”

As a consequence, insurers are looking at the broad spectrum of possible risks, on a global basis. “The main concern for insureds continues to be the physical damage to their assets and the resulting business interruption, but we are seeing an increasing volume of enquiries for non-physical damage business interruption (where there is a terrorism event that does not physically damage the insureds’ assets but there is still a business interruption),” Beazley’s O’Dwyer added.

“Technology and manufacturing are two sectors where we see this trend played out – with the flow of goods through the supply chains from Latin America and the Middle East for example suffering increasing threat of disruption.

“We are also seeing growing interest from the leisure sector in traditionally popular markets where terrorist/political violence threats are causing loss of business, for example most recently in Thailand. In addition insureds are becoming aware of the terrorism cyber risk that they face following recent publications on the subject, but once again appetite for this in the market is still limited.”

“At a high level, the main issue for underwriters (and insureds) is that the global environment is hugely volatile at the current time and is constantly changing. Within this, our particular concern is how terrorist groups such as ISIS have been able to exploit social media to spread the message and garner support. Freedom of speech is both the strength of democracy but also the soft underbelly that enables such groups to promote their cause and recruit all round the world. Individuals who are inspired or radicalised by that message pose a significant threat wherever they are based. Social media plays straight into the hands of those who want to inspire terror.”

So far, 2014 has been something of a mixed year for the terrorism insurance industry. Whilst there have not been any significant attacks there is a higher degree of uncertainty due to the extremely fluid circumstances surrounding the Middle East, where the US started bombing areas controlled by the IS in August. The lack of progress concerning TRIA is an additional element which could not have been predicted at the start of the year. It remains to be seen how things develop further and what the picture will be by the end of the year.

This article was published in the September 2014 issue of CIR Magazine.

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