Is your cover still appropriate?
Terrorism and Political Violence activity The majority of attacks and events in Europe and North America have occurred in city centres, where mass casualties or government protests have been the target rather than infrastructure. However, acts of violence and terrorism against energy facilities are not new - the majority of attacks continue to be seen in Africa, Central Asia, Latin America (namely Colombia) and the Middle East where historic and on-going conflict continues. However, in the last few years the attacks have taken on renewed significance, especially for oil processing and distribution facilities, as key oil-producing regions have increasingly become destabilized by conflict and civil unrest.
More capacity for Liability and Political Violence risks After years of considerable growth, capacity for Terrorism Property within the global insurance market has remained relatively stable at circa US$4.5 billion; however, in the last few years, market capacity for the additional perils of Terrorism Liability and Political Violence has seen growth to circa US$1.9 billion and US$1.7 billion respectively. During this time, further and rapid growth in capacity has been witnessed for Cyber Terrorism Physical Damage to circa US$600 million as well as Chemical, Biological, Radiological and Nuclear Terrorism to circa US$1.3 billion1. It is, however, now the case that the capacity growth in these additional perils is beginning to flatten and stabilise in line with the overall Property Terrorism market capacity.
Minimal impact of Lloyd’s closures on Terrorism market The performance reviews and additional scrutiny of business plans undertaken by Lloyd’s at the end of 20182 resulted in some syndicates closing their Marine or Property lines. Whereas some markets’ Terrorism treaty cover may have previously been purchased alongside these classes in combined treaties, the impact on the Terrorism market as a result of these closures has been minimal due to alternative combined treaty programmes being available to roll Terrorism treaty coverage into. The reviews also did not have any major impacts to direct market capacity, with only two syndicates, being Advent 780 (whose Terrorism team were acquired by BRIT 2987) and The Standard 1884, put into run-off. In addition, AIG’s Terrorism capacity is not expected to greatly reduce in 2019, despite reducing their line size in other classes. However as AIG continue to tighten underwriting principles we expect that their capacity will not be as easily available for those more challenging risks and long term agreements.
Pricing update In line with the minimal impact of the Lloyd’s and AIG performance reviews on capacity, rating and pricing, we do not expect to see any dramatic change through 2019. Generally reductions are being negotiated, but only to about 5%; however, rates are increasing in line with the heightened risk in certain countries and regions where stabilisation and security is deteriorating. The Terrorism and Political Violence market has continued to experience losses in the energy industry, although the majority are deemed small and not catastrophic. While these losses continue to be paid and may have some impact on renewals for those directly affected insurance buyers, this is not expected to have any major impact on general market capacity or pricing, other than as a result of the changes caused by any shift in the security environment in those regions.
Is your cover still appropriate: insurance considerations? It is clear that the energy sector remains a key target for Terrorism and Political Violence as it remains vital to infrastructure globally. As the market and the risk landscape continue to change, insurance buyers in the energy sector should consider whether the coverage they currently purchase is appropriate. This includes, but is not limited to, whether buying through government pools provides sufficient coverage for the risk presented, or whether a full standalone Terrorism and Political Violence policy or Difference In Conditions/Difference In Limits/Excess policy would provide more appropriate coverage. The flexibility to alter limits and deductibles, compared with “All Risk” property coverages, where other losses and different risk factors may force higher retentions or provide blanket limit levels that may not be applicable to specific Terrorism and Political Violence perils, should also be considered.
Is your cover still appropriate: cyber-attack considerations? In addition, insurance buyers should consider whether the perils they currently have coverage for are appropriate for the changing risk environments in which they operate. Cyber terrorism remains a headline topic for the Terrorism and Political Violence market, especially within the energy sector; trying to establish whether the cyber peril is best suited within this marketplace given that focus remains on only responding to resultant physical damage following a cyber-terrorism event.
While market capacity has rapidly grown in recent years, it is still not as readily available or as broad in coverage as insurance buyers would hope. In general, insurers will only cover a cyber-attack that fits the standard market definition of Terrorism in that it has to be politically, religiously or ideologically motivated with no coverage for other malicious cyber-attack.
Nevertheless, one consortium of Lloyd’s Syndicates has for the last few years continued to offer US$200 million of primary capacity for PD and BI following malicious cyber-attacks whether or not politically, religiously or ideologically motivated - specifically focusing on the energy, power and heavy industry sectors. This consortium can also extend its coverage to include similar extensions as may be found in the more traditional cyber insurance market, including Business Interruption in the absence of physical damage along with mitigation expenses and guidance, incident response and extortion coverage, and legal liability coverages.
While insurance buyers may already have some coverage for cyber-attacks under their “All Risk” property insurance policies (although blanket Terrorism exclusions may apply) and can also obtain coverage under a “stand-alone” Terrorism insurance policy, they may want to consider exploring such an alternative for additional certainty and breadth of coverage.
Amelie Keeble-Buckle is an Associate Director in the Financial Solutions – Terrorism & Political Violence Practice at Willis Towers Watson.
1 Source: Willis Towers Watson 2 https://www.lloyds.com/market-resources/market-communications/market-bulletins/market-bulletins (Y5232)