New reinsurance capital can help narrow terrorism coverage gap: Guy Carpenter

The maturing terror risk market continues to intertwine with the rapidly evolving cyber risk landscape, which has developed a truly global peril that will ultimately require new sources of reinsurance capital to narrow the protection gap, according to broker Guy Carpenter, the reinsurance arm of Marsh.

The terror risk landscape has changed dramatically over the last 20 years and continues to evolve as advances in technology and society as a whole, has resulted in an increasingly interconnected world.

According to a recent executive summary from reinsurance broker Guy Carpenter, it is estimated that terrorism cost the UK alone €43 billion in gross domestic product (GDP) growth in 2016, and across the European Union (EU) that cost was estimated to be €180 billion.

The broker states that the size of the figures demands that political and industrial sectors take action to build capacity in the terror market, highlighting that while inevitably the action takes the form of a security line of effort, the insurance and reinsurance sector has an important role to play.

By offering products to consumers that limit the risk of losses, or by offering products that mitigate the risk to government balance sheets, insurers and reinsurers can play an important direct and indirect role in the expanding terror risk landscape.

“It is clear our industry will play an important role in shaping the response to this threat,” says Guy Carpenter.

The size of the terror threat, combined with the growing and very real cyber terror threat, means that new sources of reinsurance capital will be required, and, given the size of potential losses, the capital markets might also have an important role to play in the space.

“The (re) insurance industry must remain in tune with these developments; it must gain insights from academia and observers on how the peril is changing, keep alert to new products in the market, unlock new sources of capacity and help clients understand their portfolios more readily so they remain relevant to their consumer base,” says Guy Carpenter.

The capital markets continues to look for ways to get closer to the original source of risk, and the willingness and ability of the investor base to access emerging and diversifying lines of business, suggests insurance-linked securities (ILS) capacity has an opportunity to be a key source of capital in the terror space, ultimately helping to narrow the terror protection gap.

“The industry is well placed to meet these demands head on. New sources of capital combined with capital supplied by traditional reinsurers can potentially create abundant supply, enabling insurers to grow their offerings, both geographically and in terms of coverage,” says Guy Carpenter.

For insurance, reinsurance, and the capital markets to better address the evolving terror risk arena, which includes the cyber terror risk landscape, Guy Carpenter notes that an improved understanding and modelling of the perils are crucial.

Terror and cyber risks are both seen as potential areas of growth for the ILS market, making the capital markets participation in supporting capacity needs for these risks seem likely.