Speaking at the International Forum of Terrorism Risk (Re)Insurance Pools in Sydney, Australia today, Guy Carpenter’s Asia Pacific CEO, Tony Gallagher, has explained the importance of retrocession markets in supporting provision of terrorism reinsurance, highlighting catastrophe bonds as an important and growing mechanism.
Giving a keynote address at the Forum, reinsurance broker Guy Carpenter’s regional CEO for Asia Pacific explained that access to private market risk capital remains an important part of the equation, for ensuring provision of terrorism insurance around the world.
“In my view, the role of terrorism pools within these public-private partnerships has continued to evolve and innovate,’ Gallagher explained.
He highlighted incremental expansion of the types of terror events and exposure covered by the risk pools, as well as important legislative changes to support that.
He continued, “Central to this evolution is the importance of retrocession protection. By securing appropriate retrocession, pools can manage peak exposures, protect their balance sheets and maintain the reinsurance market to support terrorism. Without this layer, the ability of pools to absorb shocks and continue providing stable capacity would be significantly diminished. This is even more important today with the ever-changing geopolitical environment.”
Further explaining that the need for risk capital is significant by saying, “Marsh estimates the current global capacity for terrorism treaty reinsurance from traditional capacity would be around USD 4 billion for a program. THE US TRIPA program provides $100 billion and ARPC over $10 billion. So you can see the importance of the pools in providing terrorism capacity to support the community and business. Remember the World Trade Centre loss was over $40 billion back in 2011 ($60 billion today) – the costliest terrorism event in history.”
Looking at innovation in the market for terrorism reinsurance Gallagher explained, “As the schemes represented by IFTRIP face an increasingly complex risk landscape marked by geopolitical instability, terrorism, and political violence, reinsurance pools are stepping up to play a vital stabilizing role.”
He pointed to, “A willingness to explore new tools and products like parametric insurance,” as well as “Enhanced investment in data analytics and modelling.”
Further explaining that, “Increasing sophistication in terrorism catastrophe modelling—now probabilistic and scenario based—has underpinned innovation, enabling more accurate pricing and facilitating investor confidence in ILS markets.”
Going on to say that, “Increased use of cat bonds to bring capital markets into the terrorism risk space.
“Pool Re in the UK has now placed three such bonds, and France’s GAREAT issued its first last year – each one bringing in new investors and, critically, putting more distance between the taxpayer and potential loss.”
As we reported this week, Pool Re is said to be back in the market and now seeking its fourth Baltic PCC terrorism catastrophe bond issuance.
In addition, Guy Carpenter’s Gallagher also highlighted the important role of risk reduction and resilience, explaining that ongoing investment is required.
While inclusion of cyber terrorism coverage in the reinsurance risk pools is also an important evolution.
“When designed and evolved thoughtfully, these partnerships are not “last resort” mechanisms or one-dimensional financial liabilities for governments, but proven strategic tools for states and markets to transform protection gaps and vulnerabilities into layered and sophisticated risk sharing systems which can powerfully enhance risk management strategies and private market innovations,” Gallagher said.
Access to private market retrocession capacity remains critical for the provision of terrorism insurance, with the insurance-linked securities market now playing a growing role in its provision.
Read about all of the terrorism catastrophe bonds that have been issued so far in our Deal Directory.
