Focus: Rethinking terrorism cover

By Tim Davies, Head of Crisis Management at Canopius. Featured in Insurance Day.

As the global environment becomes more volatile, it is more and more difficult for companies to ensure that the coverage available to purchase matches the risk

Following decades of brutal civil war and internal strife, Sri Lanka had enjoyed a 10- year peace before the Easter Sunday bombings brought terror back to the land, this time at the hands of Islamic terrorists. The horrific, simultaneous attacks targeting hotels and churches caught analysts, insurers and risk managers off guard. The country had been deemed an unlikely location for Islamist political violence. Now is the time for a rethink.

The nature of terrorist attacks is known to be changeable. After a two-year multinational rampage of crude attacks deploying vehicles, grenades, machetes, guns and knives as the principal terrorist weapons of choice, suicide bombings began looking like yesterday’s problem and coordinated multi-target attacks a thing of the past. Sri Lanka thrust those assumptions into reverse. The attackers, who were thought to include returned overseas Isis fighters, deployed brutally efficient and surprisingly sophisticated explosive devices with spectacular co-ordination.

No one considered an Islamist attack as a significant possibility in Sri Lanka, let alone a series of suicide attacks of such vehemence and violence. This tragic irony is heightened by the fact the island, with its recent history of civil insurgence, was in 1987 one of the first countries to establish a terrorism insurance pool. Since the only threat perceived was a re-emergence of the Tamil Tigers and with achieved reconciliation becoming ever stronger, the price of political violence and terrorism insurance came down and down. Much cover previously on the open market returned to the pool.

Some claims reached London through the facultative reinsurance of targeted hotels. Some potential insureds that previously chose not to cover their Sri Lankan exposures swiftly returned to the market for new quotations. The common practice of selectively insuring only high-risk exposures within an international programme is now being actively rethought by risk managers around the world, as the Easter parade of Sri Lankan bombs showed a large-scale attack is possible pretty much anywhere.

It has become very difficult, with the post-Caliphate turmoil of Isis and the sickening window of opportunity it has created for the old enemy al-Qaeda, to pinpoint where on the map the next explosive attack is most likely to happen. It has become clear the obvious targets may not be the ones hit.

Risk managers with exposures in the home countries of returning Isis personnel are likely to increase their purchase of political violence cover. A second, similar attack in Sri Lanka is possible; however, dissatisfaction with a government that failed to stymie the bombings may lead to street violence and riots. Companies should reassess their coverage around the world, across the board.

Active assailant cover

If terrorist tactics have made an about-turn, a recent surge in the frequency of an old threat is prompting risk managers to acquire cover for US exposures. Cover for the damage inflicted by “active assailants” (whether rampaging gunmen, car assassins or thugs with blades or clubs) is increasingly commonplace.

Following the 2012 Colorado cinema shooting, risk managers identified a clear gap between their traditional all-risk cover and their specialist terrorism policies. Many insurers now offer “active shooter” cover, although insurers, brokers, and clients alike do not yet always understand precisely what sort of cover is appropriate. The challenge is multiplied by the absence of a standard wording.

Some active assailant policies focus on returning to normality – for example, by providing business interruption cover, funding for alternate premises or money to convert the site of a slaughter into a memorial garden. Others focus on liability, which may be incurred, for example, when an organisation is found negligently to have failed to prevent an attacker’s access, indirectly abetting their mayhem. Either type of policy may cover funeral or additional medical expenses. Unlike terrorism insurance, which typically require property damage to trigger business interruption insurance, bodily injury may trigger coverage under an active assailant policy.

Risk managers should consider carefully the needs of their organisation, almost certainly in consultation with their broker, to ensure the coverage they acquire from a fragmented market is precisely what they need. For example, buying casualty cover may satisfy a corporate governance requirement, but be of no help at all when a shooting attack traps a facility behind police barriers for weeks.

Underwriters will seek the implementation of prudent and responsible security measures, and may work with brokers to suggest improvements. A strong attack response policy, implemented alongside dry runs, training and drills, is the minimum expectation. They will also consider the location. Risks in urban conurbations are considered to be more exposed, as are all risks in states with lax gun laws. Sadly, a sufficient number of active assailant events have now occurred to assess risk on these grounds with some confidence. Schools (the most common purchasers of the cover), universities and other organisations that can control access effectively are often the greater targets.

Terrorism risks are another US concern, one made more uncertain by the unknown future of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (Tripra). Passed only after long delays, risk managers remember a lack of consensus that veiled the nation’s terrorism programme for months. The authorisation expires on December 31, 2020, so the future is again uncertain. The programme was always intended to be temporary and it is likely the private market could cover Tripra’s exposures, but probably at a slightly higher price in the major metropolitan locations, but arguably with broader cover.

Acquiring standalone terrorism insurance in the interim may be more attractive for two reasons: that it eliminates the uncertainty is clear; less obvious is the cost reduction. Tripra premiums are linked to the cost of property programmes. The cost of the latter is rising dramatically in catastrophe-exposed areas such as Florida, but the standalone market makes no such link and therefore provides better value for a great many insureds.

In addition, standalone cover has no provision matching Tripra’s requirement to cover an entire insured portfolio of assets and is sufficiently flexible to allow first loss cover or insurance for selected locations only, allowing risk managers to create a more sophisticated programme for less money. The ultimate goal with all these types of cover should remain, however, to ensure the coverage purchased matches the risk. In today’s world of uncertainties, that can be difficult indeed.