Declining rates fuel stand-alone terrorism market

With the exception of a few notorious hotspots, rates for stand-alone terrorism insurance have dropped by 40 to 50 percent since 2002, according to Aon’s Crisis Management division. The reductions have been driven by a steady growth in capacity coupled with favorable claims to premium ratio which has led to increased competition.

In the immediate aftermath of 9/11, the imposition of widespread terrorism exclusion clauses in insurance contracts coincided with a massive surge in demand for terrorism cover. Few options were available, with London, U.S.-based AIG and Bermuda the insurance markets of obvious choice. It was a seller’s market and many large companies, forced to make snap decisions to replace withdrawn cover, ended up buying large limits at substantial premiums.

Since then, the market has matured greatly. Capacity stands at around $1.3 billion, premium rates have become much more predictable and have decreased significantly with reductions of 5 to 15 percent being achieved on many risks. Also, program designs are becoming more innovative.

Geographically, demand for cover is spreading much further as recognition of the terrorism threat increases. Stand-alone insurers now are less dependent on U.S. risks, which accounted for 50 percent of the market in the 12 months immediately following 9/11.

“The lack of any knee-jerk reaction to the Madrid commuter train attacks and the events in London in July last year demonstrates the stand-alone insurance market’s maturity,” said Will Farmer, a director in Aon’s Crisis Management division.

“The debate over the extension of TRIA at the end of last year highlighted the market’s growing importance. While government-backed schemes such as TRIA have assisted in providing terrorism capacity, effectiveness varies.

The necessity of such schemes in countries where the private market is able to meet demand is questionable. The stand-alone market has a very important role to play going forward,” Farmer added.