A modern risk with a long history – much has happened since Pool Re was created in 1993 to meet the immediate need for terrorism reinsurance.
That need was a direct result of numerous IRA bombings. The cost of these losses caused insurers and reinsurers to focus on the difficulties of providing terrorism cover for commercial properties, in particular the high potential cost of losses and the lack of any reliable method of estimating what the future loss experience might be.
Then, 20 years ago, Pool Re was called upon following, what is to date, the 3rd most costly terrorist attack in history. The Manchester bombing injured more than 200 people and caused significant property damage in the main shopping area of the city. This resulted in an insurance claim at that time of approx £400m, of which Pool Re paid £233m in reinsurance.
Here we are two decades on, the IRA threat has largely disappeared, yet the terrorism threat in many ways is greater than ever.
What has changed?
A key turning point followed the events of 9/11 in 2001. This reinforced the notion that terrorism was too unpredictable, and of a scale or magnitude that could not be estimated using traditional insurance tools. Subsequently reinsurers reacted as they had done in UK a decade earlier by withdrawing cover and this in turn led to the creation of more than 20 terrorism insurance schemes we now see around the world.
The collaboration between these schemes has been an important driver in sharing knowledge and ideas. The first National Terrorism Reinsurance Pools Congress took place in London last October, the next will take place in Australia later this year.
Working together is essential as all of the Pools appreciate the dynamic nature of the terrorism risk. For example while the threat of a ‘lone wolf’ with a weapon is now great, that weapon could potentially be a dirty bomb. The prospect of a chemical, biological, radiological and nuclear (CBRN) terror attack is real and is arguably the biggest challenge we face.
Other changes in the last 20 years include the return of capacity, yet that capacity is insufficient to meet market needs. Also, asset values have increased significantly, especially in major cities, including London and Manchester.
How does terrorism compare to other risks?
Though similarities can be drawn with other low probability, high consequence events such as natural catastrophes, terrorism remains inherently unpredictable given it is a non-natural event so the frequency cannot be estimated with any degree of accuracy.
There is a century of weather and loss data underpinning hurricane modelling, whereas there is little historical data on terrorism and much of it is now irrelevant.
Conversely, terrorism is not accidental and terrorists change methods and tactics and also adapt to the ability of the authorities to thwart their activities with countermeasures. This is known as ‘dynamic uncertainty’ – a term coined by Erwan Michel-Kerjan. Terrorists will change their tactics to target weak points, so increasing security in one area can simply lead to a focus elsewhere. Risk information is held by governments, but it is not easy to share, plus governmental foreign policy can influence the severity of risk.
This unpredictability means that reaching an objectively based premium for terrorism insurance is very difficult, and that is one of the main reasons a conventional underwriting approach doesn’t work.
How can terrorism cover be underwritten?
Though the underwriting process is different to conventional property covers, we can use deterministic models to inform our view of rating and are currently working to modernise and improve these. The key factors we look at in arriving at a rate are;
- Aggregated view of exposure across UK and key areas of exposure density ie where do we have most value at risk
- Target locations – There are places which might attract a terrorist such as a crowded place or shopping centre..
- Types of buildings and building environment ie high rise?
- Security and accessibility.
What does the future hold?
The dynamic nature of terrorism makes predictions difficult. What we can expect is tactical changes on the part of terrorists who will evade efforts to nullify them.
Should a CBRN event happen it would be both catastrophic and have far-reaching effects. So collaboration between government, academia and industry on threat-analysis must increase and we are working hard to achieve this.
The risk has changed over the last 20 years and we can expect this to continue. Cyber-terrorism is an emerging threat we are currently evaluating to see if we can provide a solution in the future.
Darwin was quoted as saying that it is not the strongest who survive but those most adaptable to change. That leads me to believe, that in the future we must adapt more effectively than those who would do us harm.
Steve Coates
Chief Underwriting Officer Pool Re