TERRORISM: Closing the gap

The evolving terrorist threat has led to significant shifts in risk managers’ needs when it comes to insurance. Ant Gould examines the new dynamics and looks at how the insurance industry has responded to calls for change

Former British prime minister, Harold Macmillan once said the most difficult thing about planning is “events, dear boy, events” and in the UK alone, terrorist attacks including Westminster, London Bridge/Borough Market and the Manchester Arena have certainly resulted in a major change in the threat to risk managers – from being bombed out of their premises to being kept out of them.

As deputy CEO and technical director at Airmic, Julia Graham, puts it, “the means and perpetrators of attacks has changed. Attacks by lone wolves and small groups against perceived soft targets has increased; the use of vehicles as weapons has increased; and the threat of cyber attack continues to grow.”

Graham’s view is echoed by both Marsh’s ‘Terrorism Risk Insurance Report’ and Aon’s ‘Terrorism and Political Violence Risk Map’ – the latter pointing to yet more bad news to come. “A deterioration in governance around the world gives space to terrorist groups to sustain their operations and create the opportunity for terrorist groups to reach out and impact populations and businesses at an immediate, tactical level across the world,” it reads.

The changing impact is leaving the traditional property-based insurance market behind. Last year’s attack in London Bridge, for instance, caused an estimated £1.4m of economic losses, as stallholders and restaurants were forced to close for almost two weeks. But because the terrorists did not cause any major physical damage to the affected businesses’ properties, Pool Re – the UK’s state-backed reinsurer – did not pay out after the incident. In fact, the only incident that Pool Re did pay out for last year was the Manchester Arena bombing in May, which caused physical damage to a number of buildings.

Meanwhile, the poisoning of Sergei and Yulia Skripal in March – further highlights insurance gap issues; the Salisbury incident showed the potential impact of a relatively small amount of nerve agent, with a clean-up operation spanning over 27 miles. Businesses were affected by the event for months – and not just those inside the police cordon; the wider retail and tourist industry impact is thought to equate to a 50 per cent decrease in footfall.

The Salisbury incident and London Bridge attack both highlight the issue with Pool Re – and other state-backed terrorism reinsurance schemes – that only business interruption (BI) caused by property damage is covered. After extensive lobbying by Pool Re this is about to change and the government is seeking to amend the Reinsurance (Acts of Terrorism) Act 1993 via the Counter-Terrorism and Border Security Bill. Introduced to the House of Commons in June it will extend Pool Re’s cover to include terrorism related non-damage BI losses, and, if passed, Pool Re will be the first terrorism insurance pool in the world to extend its cover in this way.

Chief underwriting officer at Pool Re, Steve Coates says: “We are currently working on our proposition and talking to key scheme stakeholders to ensure it integrates with member BI policies. As with our damage cover, the financial limits will reflect those on the underlying non-damage BI cover within the member’s property/BI policy. Timing is subject to the successful passage of the amendments to the Act of Parliament, but we are aiming for early 2019. We are hopeful this amendment will encourage more businesses to buy terrorism coverage, especially SMEs – many of whom do not [currently] buy any terrorism cover.”

The emphasis on encouraging SMEs to take out cover is a continuing theme for Pool Re. The British Insurance Brokers Association estimates that only three per cent of SMEs have terrorism cover of some sort, despite Pool Re’s decision last autumn to half the cost to insurers for some types of small business cover.

Managing director of crisis management at Gallagher, Paul Bassett, says the situation in the mid to large corporate market is very different. “We see several hundred risks a year and believe the majority of mid to large corporates based in the UK buy some [form of] terrorism related [cover] – I would say 80 to 90 per cent have. Risk managers really need to understand and analyse their coverage carefully – neither the Pool Re or standalone market solutions are perfect, but there have been many changes and movement in the last two years.”

Will the change to Pool Re make any difference to the overall market, given how much cover outside of the pool purports to cover non-damage BI? An Association of British Insurers spokesman says “while there is a market for non-damage BI, this change should hopefully [encourage] more widespread coverage. The impact of this may also depend on how the legislation applies in practice.”

This ‘the devil will be in the detail’ response is echoed around the market, but most expect to see more non-property based BI cover emerging, which, as Airmic’s Graham implies, will be lapped up if the price and coverage is right. “Insurers typically have not developed non-damage BI covers – although the demand is there,” she says.

New threat, new response

Outside of the BI extension, the market is responding to events in a number of other ways. Many insurers are looking at their lone attacker definitions – often involving a hand-held weapon, including knives, guns and explosive devices. One such insurer is Hiscox, which has created a Malicious Attack policy that provides cover whether an attack is the work of a terrorist or a disgruntled employee including loss of attraction cover within a one-mile radius of an attack.

Insurers are also rethinking liability related to vehicles and expanding the definition of a hand-held weapon. Insurer XL Catlin has this summer launched its Auto Terror Protect offering for fleet operators, vehicle rental, haulage and logistics companies providing cover for third parties and employees who may be injured in a terrorist attack, as well as first-party property damage for the vehicle and any goods in transit.

The Motor Insurers’ Bureau is also polling its insurer members on whether the industry pool for uninsured motor claims should re-assume liability for claims arising from terrorist attacks using vehicles. The vote requires 75 per cent of members to approve for the changes to be passed.

Outside of pure insurance coverage, there is a flourishing market for risk prevention and response services – an area that the Marsh 2018 report suggests could be one of the major areas of growth over the next two years – and risk managers can expect a raft of revised and new offerings from insurers, brokers and third parties in this area over the coming 12 months.

In the final analysis, as terrorism attacks change, and insurance evolves in response, there should be more choice and more affordable and relevant coverage available for risk managers. However, inevitably the proof will be in the pudding when it comes to claims as to whether the market has really understood the risk it is starting to take on.

This article was published in the July 2018 issue of CIR Magazine.

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