Cat bond managers views on terrorism risk

Four people died in last Friday’s terrorist attack in Carcassonne and Trèbes in the south west of France, for which Isis claimed responsibility.

Terrorism risks and losses remain an area that the global insurance and reinsurance markets are looking ever more into. A sign of that has been the announcement by Property Claim Services, a branch of data provider Verisk Analytics, of the forthcoming launch of a loss aggregation solution for terrorism risks in 2018.

The PCS Global Terror aims to provide industry loss estimates on single risk terrorism insurance loss events of at least $25m, that cover physical damage and business interruption losses.

The index’s initial historical database will be comprised of loss estimates for 14 terror insurance loss events, from 1992 to the two most recent terror attacks in Turkey and Belgium.

Also on 22 March 2018, UK-based terrorism risk reinsurer Pool Re welcomed the British government’s commitment to amend the 1993 Reinsurance (Acts of Terrorism) Act to extend its coverage to non-damage business interruption losses resulting from acts of terrorism.

Pool Re explained it is currently restricted by the 1993 Act only to pay out if physical damage has occurred to commercial property, meaning that businesses, inside a police cordon, that suffer financial loss through being unable to access their property or to trade, are only covered if there has been physical damage during a terrorist attack.

Julian Enoizi, chief executive, Pool Re, said: “After months of extensive collaboration between ourselves and the government, today’s announcement represents another landmark moment for the insurance industry’s ability to provide a comprehensive response to acts of terrorism in the UK and demonstrates the strength of public/private partnership in disaster risk financing.

“This amendment will close the terrorism insurance gap for businesses up and down the country, which, combined with our efforts to make cover more affordable for SMEs and regional businesses across Great Britain, will increase the resilience of the economy. Businesses can be confident they will be covered in the event of a terrorist attack, and able to get back on their feet quickly for the benefit of their community, customers and suppliers.”

As highlighted by ILS specialist media Artemis, “terrorism risks are already traded in the reinsurance and capital markets, however the lack of a robust and reliable trigger has meant that industry loss and index based terrorism risk transfer remains nascent.”

Risk measuring
InvestmentEurope has hence asked three catastrophe bonds fund managers their views on terrorism risk and the eventual launch of terrorism-linked cat bonds in the coming months or years. If such instruments would provide diversification in insurance-linked securities strategies, the measure of terror-related risks remains a hurdle.

Credit Suisse Asset Management’s head of Insurance-Linked Securities Strategies Niklaus Hilti says he and his team welcome the issuance of cat bonds exposed to perils which are diversifying away from US wind.

“However, we only invest in risks that we indeed can sufficiently quantify and price. We believe that the currently available catastrophe risk models are able to capture the severity of such events, yet are not sufficiently developed to capture the frequency,” Hilti explains.

Simon Vuille (pictured), portfolio manager on the ILS team at Lombard Odier Investment Managers, points out that the team tries to approach any new type of risk with an open mind and that two main criteria need to be fulfilled in order for it to take a new type risk.

“Firstly, the occurrence of events need to be independent from the macro-economic cycle. This is paramount, as we do not want to jeopardize the crucial characteristic of our asset class for investors. Secondly, the risk needs to be quantifiable. While we believe terrorism is largely independent from the macro picture, it is difficult to quantify the risk and to extract meaningful trends from historical data,” he argues.

Florian Steiger, head of Cat Bonds at Twelve Capital, pinpoints his company has been an investor into terrorism-linked private ILS instruments and that it would certainly welcome the issuance of cat bonds insuring that peril.

“From a portfolio construction perspective, the inclusion of any diversifying peril is certainly positive and hence, assuming sound underwriting and structuring, cat bonds insuring against property damage from acts of terrorism would most likely be included in our portfolios,” says Steiger.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is deputy editor and French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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