This article originally appeared in Smart Business Magazine’s July 2015 edition.
Company executives need to understand the coverage provided by countries local reinsurance pools to best manage the unfortunate reality of terrorism risk. The unpredictable nature and potential severity of a terrorism event make it a difficult peril for insurers to include in the property policy. In order for insurance companies to offer coverage while protecting their own solvency, they can transfer or share the risk through reinsurance mechanisms. Many countries have thus created reinsurance pools (typically government-organized) for insurers writing business within their borders, but its not a perfect system.
Its impossible to procure uniform terrorism coverage across your global exposures solely through participation in the local pools. Standalone terrorism policies are available to fill some of the gaps, but the key is identifying your exposures and making an informed decision on what to buy versus self-insure.
What are the local reinsurance pools?
Each reinsurance pool has been born out of necessity, and therefore addresses terrorism concerns specific to that country. As a result, each pool is unique in how it defines terrorism; how its funded; and how it calculates limits, deductibles and premium. For instance, the pool in the United Kingdom was created as a result of attacks attributed to the Irish Republican Army (IRA) and responds to relatively small but frequent acts. The pool in the U.S., Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), was first created as a result of the 9/11 terrorist attacks and responds to severe loss events. Some sort of pool exists in 20+ additional countries, hence the need for an educated risk partner to guide you through your options.
Where do you see problems arising?
U.S.-based companies are presented with the option to add the peril of terrorism back into their global property policy by opting in to TRIPRA with a premium surcharge. The buyer checks the box and can answer to management or the board that they have terrorism coverage. However, the scope of coverage is more limited than is perhaps emphasized: TRIPRA applies to acts only within the U.S. and must meet a minimum industry loss amount, and does not cover NBCR (Nuclear, Biological, Chemical, or Radiological) events. Similarly, other country pools have their own triggers that must be met to receive payment for claims. Add-on participation in pools is easy and provides matching limits and deductibles for property risks, making it an appealing option for the sake of simplicity. However, it can present serious problems if a loss occurs and coverage
doesnt respond as you thought it would.
How does a company find the right option?
Conduct an exposure analysis that includes each country your company houses assets, as well as those involved in transit to and from suppliers and customers. A conversation can then be had between client and broker using the output in a grid view, looking at existing country pools, what is covered under each, requirements mandated by the country, and additional coverage available in the private terrorism insurance market to replace or supplement the pools. Finally, loss scenarios giving estimates of damage and business interruption should be reviewed and updated at each renewal. Any choice for participation in local pools should be the result of a clear understanding of how it fits in with your risk management strategy. Strategies may range from keeping insurance spend to a minimum while meeting local lender requirements, to obtaining competitive rates with a standalone policy blended with local policies (Difference in Conditions/Difference in Limits insurance) to secure the broadest protection available.
Abundant catastrophe capacity in the insurance market has helped standalone terrorism pricing and now is a good time to explore this option if a companys exposures justify it. Whatever risk management strategy you employ, an informed decision will make the threat from terrorism a little less menacing.