Newsletter Sign-up

By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Ding, dong, the wicked warlock is dead. Celebrations could be heard on May 2 and beyond after the news got out about Osama bin Laden's death.

After all, the "massive counterterrorism success," as described by Gordon Woo, chief architect of the terrorism model from Risk Management Solutions Inc., reinforces the message that "terrorism is controllable." That standup security, military and intelligence forces can ratchet up their work to balance an increased risk of violence from political and religious extremists. Such has been the case in the West since Sept. 11, 2001, after which only two successful attacks have been carried out. In Pakistan, where counterterrorism is either corrupted or nonexistent, Woo explained, more than 1,000 terrorist attacks were successful last year alone.

Woo hopes that bin Laden's death prompts more insurers to write stand-alone coverage in the United States. One can guess that he hopes these insurers employ RMS' model when underwriting the business, a model that's based on this notion that the forces of law and order are able to negate the increasing threat from terrorists. This model is also based in part on an average number of expected plots per year in the West (four) and the average number that will succeed per year (0.6). Those numbers will not change, Woo said.

TIGHTENING CAPACITY

Perhaps Woo, however, will be waiting for those insurers.

For carriers looking to get involved in the terrorism insurance market, it's more about their ability to concentrate capital in key at-risk areas and still pay claims should something happen, according to Rob Cruz, vice president, terrorism, at Hiscox Specialty, one of the few U.S.-based carriers that writes stand-alone terrorism coverage in the United States. (London and Bermuda markets also write the business.)

"Insurers will look at their overall portfolio and see if it's a market that they want to get in," he said.

Whether or not counterterrorism can always check increased terrorist threats, the issue for insurers is the concentration of values in key cities like New York, Chicago and San Francisco. That is where the risk is "stacked vertically," as Cruz put it. What's more, insurers might not just be on the hook for direct property loss but also extra expense and business interruption should one of those big targets be hit.

So, no, don't expect new players in key zones. Expect the opposite. Thanks to tightening in the overall property market, the concern caused by the political unrest and revolutions in the Mideast and North Africa, and now the death of Osama bin Laden, the marketplace for war, terrorism and political violence coverages is getting limited, Cruz said.

"Where I'm finding a shortening of capacity is in key metropolitan areas," he said, pointing in particular to certain parts of Manhattan.

According to a 2010 Marsh report on terrorism insurance, approximately $750 million to $2 billion per risk was available in stand-alone capacity for companies without "sizeable exposures in locations where insurers have aggregation problems." Where aggregation issues existed, the estimated market capacity was about $1 billion.

TENSE INSUREDS

Not just underwriters are getting tense. Cruz has received inquiries about terrorism insurance over the last week at greater than the normal rate. Clients are also in touch to review their existing coverage. And some companies are seeking coverage because their lending institutions have backdated terrorism coverage requirements since bin Laden's death.

For good reason?

"For al-Qaida, it is kind of a put-up-or-shut-up moment. They have to stage an attack not just to avenge bin Laden's death but also to show that they are still relevant, as a threat to the U.S. and to the global jihad movement," said Bruce Hoffman, director of the Center for Peace and Security Studies at Georgetown University's School of Foreign Service, during an online interview with Business Insider.

That's not even mentioning al-Qaida subsidiaries or so-called "lone wolf" actors trying to cause mayhem, either in retribution for bin Laden's killing or simply because that's their modus operandi.

Then again, as Woo said about terrorists: "My line has always been that the resolve is always there. Resolve is not the same thing as capability."

May 12, 2011

Copyright 2011© LRP Publications