Terrorism re/insurance availability helped by alternative capital inflow

The availability and price of terrorism risk insurance and reinsurance coverage has increased this year, as reinsurers look to provide additional terrorism re/insurance capacity as competition from alternative capital prompted them to be more supportive of the class.

In a report on the terrorism risk insurance and reinsurance market published by reinsurance broker Guy Carpenter yesterday, the influence of alternative reinsurance capital is once again highlighted for having an influence on classes of business were perhaps this new capital does not itself play fully yet.

As capital levels have increased in reinsurance, reinsurers have adjusted their focus in order to avoid some of the areas of the market which have come under the greatest levels of pressure. That has resulted in reinsurers cutting back on property catastrophe underwriting, moving to new areas of the market, or alternatively adding features and relaxing terms to property catastrophe reinsurance agreements in order to attract more premiums.

The terrorism risk reinsurance market has been affected by this trend, according to Guy Carpenter, with several factors that converged around the January 1 renewals this year resulting in an increase in terrorism re/insurance capacity. One of these factors was alternative capital, according to the broker, with another being the uncertainty around the expiration and renewal of TRIPRA.

Guy Carpenter explains:

The inflow of capacity from alternative sources was an important development, prompting traditional reinsurers to become more supportive of terrorism reinsurance opportunities for traditional property catastrophe programs.

The scheduled expiration of TRIPRA also resulted in increased capacity as a number of insurers initiated or enhanced trading relationships with reinsurers that offered terrorism reinsurance solutions in an effort to anticipate and mitigate non-renewal.

In the event of TRIPRA not being renewed Guy Carpenter said that it would expect both availability and demand for terrorism insurance and reinsurance capacity would rise significantly, with pricing also expected to rise.

However, if that happens the capacity available from private traditional reinsurance options may still not be sufficient to cover the demand created by an expiration and non-renewal of TRIPRA.

On the subject of reinsurers looking to terrorism risk as a way to avoid softening rates and competitive areas of the market, Guy Carpenter continued:

This reflects the wider reinsurance market’s environment of ample capacity due to low loss experiences, strong balance sheets and an influx of capital from alternative sources. Much of this alternative capital is being deployed in the US property catastrophe market, prompting reinsurers to move some of their capacity away from this business segment and into other lines.

The well-capitalised reinsurance market has also led to an increased inclusion of terrorism cover in catastrophe excess of loss contracts, savings for insurers buying terror cover, savings for retrocessional terrorism pools as rates declined in the retro market and a trend towards multi-year deals.

However, the alternative reinsurance capital is not yet extensively available as a source of terrorism risk capital, said Guy Carpenter, explaining;

It is important to note that the influx of capacity from alternative sources into the US property catastrophe reinsurance market has not yet been widely deployed into terrorism risk. This is mainly due to a lack of confidence in the probability component of terrorism models, the tail risk/ payout patterns for workers compensation and the possible correlation of a downturn in the equity/investment market to a large-scale terrorism event.

Risk modelling remains a real issue here, with the ability to quantify the economic, insured and human losses from terror attacks still posing a major challenge for re/insurers and alternative capital alike, said Guy Carpenter.

As we’ve written before there is an element of alternative and ILS capital which underwrites terrorism risks, but it remains a relatively small component of the available capital markets capacity in the reinsurance market. The concerns over correlation between terror events and financial markets remains an issue, along with the issue of fully understanding the risks through modelling.

However, an appetite does remain in the ILS market to provide a greater level of terrorism protection and should TRIPRA’s renewal fail to be realised we would likely see more extensive efforts to provide capacity and work on structuring deals to remove unknowns.

So the influence of the well-capitalised reinsurance market, supplemented by ILS capital inflows, is felt in the terror risk market despite ILS’s relatively small direct participation there. For traditional reinsurers this is food for thought as to where ILS may influence next.