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The Actuary The magazine of the Institute & Faculty of Actuaries

Terrorism remains major threat to insurance industry

The report on global terrorism and the terror reinsurance market by Guy Carpenter & Company, Terrorism: Terror Market Continues to Provide Abundant Cover, highlights that the global terror threat has become increasingly diverse and dispersed in nature, shifting to softer targets and more localised attacks and plots.

The number of terrorist attacks peaked at more than 14 400 in 2006, with only a slight dip in frequency over the past five years.

The report also found that despite an estimated $6bn to $8bn of terror reinsurance capacity currently available in the US market - and an over-supply of terror reinsurance globally - the re/insurance industry remains vulnerable to a major terrorism loss, since a major market-moving event could quickly shift the current supply/demand dynamic.

Reinsurance capital allocated in support of terror risk is likely to continue to be limited and defined given the uncertain nature of this peril.

The report examines the evolving threat of global terrorism and provides an in-depth review of the global terror reinsurance market, including advances in modeling terrorism.

Key issues covered in the report include: global terrorism; terror reinsurance market; and terrorism solutions.

David Flandro, global head of business intelligence at Guy Carpenter & Company, said: "Since the catastrophic events of 11 September 2001, global terrorism has had a profound impact on the re/insurance market. Although the nature of the threat is very different today from what it was ten years ago, terrorism remains a constant and serious threat.

"It is forever evolving as terrorist groups and individuals adapt their tactics to counter-terrorism measures and global events. This report seeks to provide a better understanding of how that threat is changing, the varying risks in different regions of the world and what developments are likely in 2011 and beyond."

Paul Knutson, head of terror risk specialty at Guy Carpenter & Company, added: "The dynamic nature of terrorism, and the uncertainty in identifying the targets and frequency of attacks, requires a different approach to risk management and thus a different approach to transferring risk to the reinsurance market. Compared with natural hazards such as hurricanes and earthquakes, the underlying analytics supporting terrorism risk management are still in the early stages of their evolution."