Companies buying stand-alone political violence and terrorism coverage can expect significant rate hikes and tightened capacity as insurers respond to rising losses and rising reinsurance costs.
Russia’s invasion of Ukraine led to a tightening market and conditions intensified at reinsurance renewals on January 1, with the impact on insurers’ political violence and terrorism book still evolving, experts said.
Risk aggregations are being reviewed and insurers’ net positions are changing, which is likely to lead to further rate increases, they say. In recent years, coverage of political violence has broadened to a wider range of perils, and demand has increased while losses have become more common.
The war in Ukraine alone caused an estimated insured loss in the war, terrorism and political violence market of between $1.5 billion and $5 billion, excluding aviation and marine losses, said Morgan Shrubb, New York-based head of terrorism for Axa XL, a unit of Ax SA.
An increase in mass shootings in the US, riot casualties in South Africa in 2021, rising social unrest due to the cost of living crisis, and recent political upheavals in Brazil and Peru have had a “tail wagging dog” effect, She said.
“Now that reinsurance costs have gone up, insurance companies obviously can’t absorb all these losses on their books and have to start raising rates to keep up with increased costs and increased risk,” Shrubb said.
Some capacity has withdrawn from the market because several insurers were unable to successfully negotiate contract renewals on Jan. 1 at premiums that would allow them to continue writing the business, said Jen Rubin, New York-based senior underwriting director and director of war and terrorism at Liberty Specialty Markets, a unit of Liberty Mutual Insurance Co.
Liberty Mutual remains engaged in the market but looks at terrorism and political violence risks with a sharper lens, she said.
“We are seeking rate increases across the portfolio to offset our increased cost of doing business due to the increases in reinsurance rates and inflation that we are seeing in the market,” Rubin said.
Across the industry, many insurers are seeking at least 20% rate hikes, but rates vary based on the individual risk profile and geographic footprint, she said.
Adam Posner, Miami-based head of U.S. terrorism and political violence at Munich Re Specialty Insurance, a unit of Munich Reinsurance Co., said capacity in the terrorism and political violence market remains robust.
The impact on the primary market of reinsurance renewals is still playing out, but “there is still significant capacity in the stand-alone terrorism market to be able to take care of the large risks,” Posner said. Munich Re Specialty can deploy $425 million in capacity for a terrorism placement and its appetite has not changed, he said. For political violence risks, the capacity varies depending on the threat level in a country, up to $35 million per risk, he said.
It is too early to say how the political language might change, he said.
Political violence and terrorism risks experience limitations in coverage, said Tarique Nageer, New York-based head of terrorism placement for Marsh LLC. Russia’s invasion of Ukraine has led to insurers’ concerns about other geopolitical hot spots such as Taiwan, where there is a “diminishing appetite for political violence coverage, with markets looking to reduce their exposures and choosing to underwrite higher risk territories” for operations located . there, said Mr. Nageer.
Over the past five years, coverage under the political violence umbrella has expanded to include events such as strikes, riots and civil strife up to war, said Adam McGrath, London-based head of international political violence at Mosaic Insurance Holdings Ltd.
Greater awareness of the potential for systemic loss has led to a shift in the breadth of coverage, McGrath said.
“There is a clear trend of markets trying to limit extensions for things like strikes, riots and civil strife” through monetary sublimits and reduced coverage, he said.
Data and analytics can help companies continue to secure broad coverage terms from insurers, but contingent time element coverage extensions are declining, said Fergus Critchley, New York-based head of crisis management North America at Willis Towers Watson PLC.
“The insurance companies want a lot more information to provide that coverage and they really only offer coverage for named customers and suppliers,” he said.
Companies should match their exposure with appropriate coverage, “because not all of these products are created equal,” said Jeff Buyze, Fort Lauderdale, Fla.-based vice president, national real estate practice leader, at USI Insurance Services LLC.
“The details matter here because if you take any monolithic terrorism policy, they’re all going to have different exemptions, wording or definitions of what terrorism actually is,” Mr. Buyze. “One line can make the difference between getting paid or not getting paid,” he said.
Large increase in insurance prices prompts review of exposures, risk appetite
Companies should carefully evaluate their exposures and coverage needs in a hardening market as political violence and terrorism threats evolve, experts say.
Policies are highly customizable and businesses can choose which locations the coverage applies to, said Jeff Buyze, Fort Lauderdale, Fla.-based vice president, national real estate practice leader, at USI Insurance Services LLC.
Companies need to understand their risks and vulnerabilities and identify appropriate boundaries, he said.
“Too many times I see insureds buying their full total insured values for terrorism across their schedule. They have a good risk spread. It doesn’t make sense to buy, say, $100 million in coverage when they really only need $10 million,” says Mr. Buyze.
Many companies overbuy terrorism coverage, so reducing limits can be an effective way to reduce costs, said Morgan Shrubb, New York-based head of terrorism for Axa XL, a unit of Axa SA.
“Raising the deductible doesn’t really do anything. It’s a tough market, she says. Another approach would be to buy coverage backed by the U.S. federal backstop put in place by the Terrorism Risk Insurance Act of 2002, but with real estate markets still tight, prices are rising and coverage through TRIA is more expensive, she said.
Global companies entering regions with a history of violence and volatility inevitably face associated security and insurance costs in the form of terrorism or strikes, riots and other events, said Adam McGrath, London-based head of international political violence at Mosaic Insurance Holdings Ltd .
In the case of strikes and riots, the security of soft-target properties is critical, McGrath said. For example, automatic shutters can immediately protect properties and prevent systemic loss when multiple stores are raided, he said.