During the first half of 2017 the Terrorism and Political Violence market followed a similar trend of recent years - the over-capitalisation of the global insurance market and low market loss ratios continued to cause a softening of the market and decreasing rates. However, due to the majority of the Terrorism and Political Violence market having strong ties into their “All Risk” Property counterparts, often with either linked or shared treaty reinsurances and with the 2017 Atlantic hurricane season being the worst seen since 2005, the second half of 2017 and the start of 2018 has seen a slowdown in rate reductions, with much of the market holding rates flat for now and some rate increases in “higher risk” territories.
However, with the treaty reinsurance season generally not seeing as severe widespread increases as initially expected (see Willis Re 1st View January 2018) and with a number of initial loss estimates recently being lowered (albeit with many insurers still reporting combined loss ratios in excess of 100%) the likelihood of the market generally holding rates flat on loss free accounts or in “lower risk” territories for the remainder of the year is ever decreasing.
Whilst the last three years have recorded steady increments in the number of Terrorism and Political Violence events globally, the majority of actual attacks against the energy industry have been mostly seen in the Middle East, Latin America (notably Colombia), Africa and Central Asia, where the legacies of ongoing conflict perpetuate themselves. Whilst the last three years have seen increased attacks in Europe and North America, these have mostly been in city centres and have targeted mass casualties rather than infrastructure.
Along with terrorist attacks and both global and localised conflicts, the threat of strikes, riots, civil commotions and protests remain as an ever-present risk to the energy industry. For example, US President Donald Trump has pledged to remove “roadblocks” to oil, gas, and coal developments and threatened to end climate and clean energy spending. In particular, he has pledged to revitalise the coal industry and this is likely to face opposition from environmental activist groups. Furthermore, many new construction projects globally will continue to face environmental activism and local opposition, including those where land disputes and population displacement may arise.
Whilst the Terrorism and Political Violence market and the risk landscape continue to change, insurance buyers in the energy industry should continue to consider whether their current purchase is appropriate. This could include, for example, whether buying through government pools provides sufficient coverage, or if either a full stand alone Terrorism and Political Violence policy or Difference In Conditions/Difference In Limits/Excess policy would provide more appropriate coverage for their needs. This can also include altering limits and deductibles compared with “All Risk” coverages where, for example, recent losses and different risk factors may force higher retentions or lower limits in order to balance premium spend but this may not be as prevalent within or impactful upon rating and pricing within the Terrorism and Political Violence market.
Insurance buyers should also continue to consider whether the perils they currently buy are appropriate for the changing risk environments they may operate in. For example, in recent years events in Egypt and Turkey have highlighted how quickly insurance needs and buying habits can change rapidly. Many buyers in Turkey, both in and out of the energy industry, tried to renew their insurance policies, increasing their coverage from Terrorism only to include full Political Violence towards the end of 2016 and the start of 2017. At that time, the market faced a very challenging period of managing demand (for both current demand and to hold reserves for expected demand in the year ahead) against available capacity and basic economics states that this also therefore affects pricing.
Bearing this in mind, insurance buyers should, as much as is reasonably possible, given what are sometimes such unforeseeable events, continue to use everything available to them to try and foresee their potential exposures and ensure that their insurance programme is sufficiently designed around this, and not just waiting until their traditional renewal period.
In numerous previous issues of the Energy Market Review, we have discussed the market beginning to respond to physical damage following “cyber terrorism”. Whilst available capacity for Physical Damage following a cyberattack has grown over the years to around US$400 million (with some insurers now having reinsurance protection on what was previously a “net line” offering) it is maybe still not as readily available or as broad in coverage as insurance buyers would be hoping.
Insurers will usually only cover a cyber-attack that fits the market standard definition of Terrorism (being politically, religiously or ideologically motivated) rather than extending to any malicious cyber–attack. They note specifically that many “All Risk” Property insurance policies will likely have similar coverage that would only exclude politically, religiously or ideologically motivated cyber-attacks as a part of their more general Terrorism exclusions.
Some very limited capacity may also be available from the cyber insurance market for resultant Physical Damage, but insurance buyers may still generally struggle to find one clear policy with meaningful capacity for Physical Damage following cyber-attacks.
However, one consortium of Lloyd’s Syndicates has been running for a number of years now, providing US$200 million of affirmative primary capacity for Physical Damage and Business Interruption following malicious cyber-attacks (whether or not politically, religiously or ideologically motivated), with a specific focus 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. Whilst insurance buyers may already have some coverage for cyber-attacks under their “All Risk” Property insurance policies and can also obtain coverage under a “traditional” Terrorism insurance policy they may therefore want to consider exploring such an alternative for extra certainty and breadth of coverage.
Finally, with the threat of strikes, riots, civil commotion and protests remain being an ever-present risk, it is important that insurance buyers review what coverage they may or may not have. Whilst many may have some form of coverage in their “All Risk” Property policy or a stand alone Terrorism and Political Violence policy, this will most likely not include any coverage for Business Interruption due to site access being prevented or hindered by strikers or protestors in the absence of Physical Damage.
In response to this, Willis Towers Watson and a leading Lloyd’s Syndicate have recently collaborated to offer a new and exclusive policy wording covering Impairment of Access. This Impairment of Access coverage uniquely responds whether or not Physical Damage has occurred from an act of protestors, riot, strike, civil commotion, malicious damage, sabotage and/or terrorism and whether or not the Impairment Of Access was due to an act at the insured’s site or within a pre-agreed radius or access route (whether or not the insured was the intended target of such act).
Lyall Horner is an Account Executive in the Financial Solutions – Terrorism & Political Violence Practice at Willis Towers Watson London.
