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The Trials and Trends of Terrorism Risk Insurance

It seems like global terrorism has become one of the most alarming aspects of modern living. The media is filled with news of terror attacks and political skirmishes. This social instability has created a competitive market for terrorism risk insurance not just in the US, but around the world. The market has grown quickly in the United States, considering the limited capacity the industry had following the World Trade Center attack back in 2001.
President George W. Bush signed the Terrorism Risk Insurance Act (TRIA) into federal law in 2002. The legislation offered a federal “backdrop” for terrorism-related insurance claims, while also encouraging market growth by allowing insurers—and the whole industry—to manage terrorism risk exposures.
Introducing the backdrop offered by TRIA encouraged property insurance companies to accept the risk of terrorism, which created a wealth of new capacity alongside a reduction of prices. There is still a standalone market that offers better assurance to buyers through coverage that doesn’t require government certification of what is lost during an Act of Terrorism.
The number of people taking out terrorism insurance is rising internationally as rates become more affordable. The conditions of coverage have broadened as well to include things such as threats, active shooters, non-damaging business interruptions, and limited cover for cyber and denial of service attacks. There are also more people taking out coverage against political violence compared to the limited conditions offered by the standalone terrorism insurance policies.
There are still some shortfalls to the industry, in particular with nuclear, chemical, and biological insurance. The reason for this is that the reinsurance market for these exposures is rather limited. Managing these risks, and the accumulation of the risks themselves in urban areas, is becoming a problem for insurers.
Insurers and brokers are dealing with other difficulties when it comes to terrorism insurance. Reductions in pricing with increases in coverage, paired with the higher frequency of incidents or loss has decreased margins significantly for these insurance products. Reducing the price of terrorism insurance has increased sales of the product, but it is becoming challenging to retain these policies.
The industry is also dealing with changes in terrorism trends. The past few years has seen an increase in the number of terrorism attacks involving vehicles, and this trend is expected to continue.
As well as an increase in vehicular attacks, there is also the very likely possibility that drones will be involved in terrorist attacks in the near future. It will be important to implement geo-fencing at airports and places where large groups of spectators gather together, such as sporting events.