9 April 2018Actuarial & underwriting

More captives are insuring terrorism risk, shows Marsh report

More organisations looking to cost-effectively manage their net retained terrorism risk are using captive insurers to access the Terrorism Risk Insurance Program Reauthorisation Act of 2015 (TRIPRA), according to Marsh's 2018 Terrorism Risk Insurance Report.

The number of Marsh-managed captives actively underwriting one or more insurance programs that access TRIPRA increased 44 percent from 115 to 166 captives in 2017.

In the wake of recent terror attacks, terrorism insurers are expanding terrorism definitions to include active assailant events. Marsh explained that in some cases they are developing specialty products that offer first- and third-party business interruption protection for businesses that suffer lost income or revenue without the need for a direct property damage trigger.

“While the number of terrorism incidents and casualties declined in 2017 over 2016, terrorism remains a persistent and significant threat to organizations as evidenced by the recent spate of attacks in Europe and the US,” said Tarique Nageer, terrorism placement advisory leader, Marsh. “As the risks have evolved, the terrorism insurance market has proactively responded with expanded coverage.”

The report suggested that captive insurers can generally offer broader coverage than what is available through policies issued by commercial insurers. Some common restrictions or exclusions in commercial insurance policies can be avoided through customised coverage for   nuclear, biological, chemical or radiological (NBCR) attacks, contingent time-element losses and cyber terrorism.

While captives can offer coverage for terrorism, the report explained that many do not, or do not do so optimally.

"Captive owners often find that the total cost of implementing terrorism insurance programmes compares favourably to the cost of buying from commercial insurers. And they sometimes find a captive is the only viable option, such as when seeking to secure significant limits for NBCR attacks," Marsh said.

"Although TRIPRA guidance states that the federal backstop provides reinsurance protection to insurers that experience NBCR losses, insurers are not required under the law to offer the coverage. The lack of a TRIPRA mandate for NBCR has resulted in coverage not being widely available in the traditional insurance marketplace. Captive insurers are able to offer this coverage and gain access to reinsurance protection afforded by TRIPRA."

The report also suggested that captive may be a viable means for some companies to insure against cyber terrorism, due to changing definitions under TRIPRA in December 2016.

"Businesses often conclude that using a captive to write cyber terrorism risk is a cost-effective and relatively easy way to reduce net retained risk, especially for companies that already own captives," it said.

Another key finding from the report was that kidnap and ransom insurers are seeking to restrict coverage for cyber risks in their policies after incurring sizable ransomware losses in 2017.