Terrorism – firms still under-insured and under-prepared

Terrorism and political violence is an ever-present threat for multinational businesses, and will continue to be so in the foreseeable future. However, ACE’s research in Europe suggests that many companies may be both underinsured and underprepared to manage these risks. Piers Gregory and Clive Hassett consider the challenges of structuring a global insurance programme for terrorism and political violence.

After more than a decade of highly visible international incidents, it is unsurprising that obtaining insurance for terrorism and political violence has become a key imperative for risk managers of large multinational companies. In fact, recent research by ACE reveals that terrorism and political violence is the top emerging risk concern among businesses across Western Europe.

What may come as a surprise, however, is that losses from terrorism are still excluded from most standard commercial insurance policies and that fewer than 10% of those surveyed have dedicated insurance to specifically cover these risks. Indeed, the research suggests that 15% of European companies are aware of the potential gaps and a further 8% are aware, but are unsure how to obtain cover. In addition, around one in five believes terrorism and political violence risks are covered under one or more policies in their insurance programme, although this may often not be the case in practice.

A primary reason for this coverage gap appears to be a lack of clarity as to how appropriate coverage can and should be arranged. This is particularly evident in the international arena, where multinational companies may encounter difficulties as they seek to put terrorism insurance in place across their international operations. Because there is also no universal approach towards insuring terrorism risks, a single global policy issued in London (for example) and intended to provide terrorism cover in multiple countries in Asia, North America and Latin America, is unlikely to be either compliant or work as effectively as intended.

Furthermore, the recent wave of social and political unrest in certain countries has triggered a move to extend policy coverage to damage resulting from politically-related violence and even conventional war perils. Such coverage provides clients with greater protection and more responsive policies. But, at the same time, poorly constructed policy wordings have given rise to inconsistencies and gaps in coverage.

Coverage and programme structure

Diversity of legislation demand customised solutions

The landscape of terrorism insurance arrangements is both diverse and complicated, with terms and conditions mandated on a country-by-country basis. Any global insurance programme covering terrorism risks must take account of these local terrorism insurance regulations. It follows that global terrorism programmes will be bespoke and individual to the specific insured.

The rules governing the operation of many of the terrorism pools and other arrangements are often very detailed and demanding. They address not only technical issues, such as rating, deductibles and covers, but extend to operational and administrative matters as well.

For example, Pool Re in the UK requires formal client acceptance of a quote within 30 days or cover will not take effect.  Similarly, the Concorcio in Spain demands payment of its levy within 30 days of policy inception to ensure coverage. Other countries are equally precise, with their own unique terrorism insurance requirements.

In addition to terrorism, policies can be broadened to provide cover against strikes, riots and civil commotion, commonly termed “political violence” (PV), as well as war and civil war. It is important to understand that not all of these risks will necessarily be covered by the various pools and buyers must be extremely attentive to the precise definition of words, expressions, exclusions and endorsements, particularly within the context of a global programme, as countries apply different interpretations to these terms.

A feature of most pools and other national arrangements is that they depend on a government or another party’s “certification” that the occurrence will be declared as an “act of terrorism” in order to trigger the coverage. Political and economic factors could potentially influence this decision and therefore, to reduce uncertainty, consideration should be given to purchasing cover for broader PV-related perils that typically are outside of the remit of a standard property policy.

Factors to consider when structuring a global programme

There are a number of factors that must be addressed when structuring a global programme, in addition to the typical complexities that arise around more standard global covers, such as taxes, local and master policy wordings and claims handling protocols.

In some countries, the terrorism insurance structure will be mandated by specific rules, while in others it may be possible to adopt an independent approach. In many cases, there will be no specific rules at all; in others a combination of a pool and open market solution may be an option.

A risk manager or insurance buyer should challenge both their broker and potential insurer to clearly demonstrate their understanding and ability to manage the specific characteristics of terrorism cover wherever it is required.

The development of a matrix around a series of core questions will enable an effective programme to be designed and implemented and ensure there are no gaps in cover, provided that all local rules are correctly followed.

A global, integrated approach to terrorism insurance

As terrorism is such a complex and critical area of insurance, risk managers should strongly consider implementing a global insurance programme so that their company can have a centralised view, control and understanding of the global arrangements across their organisation, which will enable them to clearly explain to their stakeholders the financial protections that are in place.

Two potential approaches may achieve this, each with its own specific features and challenges. One approach is to put in place a master property policy that includes terrorism and associated covers, such as political violence, and then to support it with local policies that have extensions to cover these perils and take account of the variety of terrorism insurance regulations in these countries.

The benefit of this integrated approach is that the insurance is underwritten by the same insurer or group of insurers. There should therefore be a clear consensus as to how the policy works, and less uncertainty about how other policies might operate and interact in the event of a terrorism or political violence claim.

The integrated approach is also likely to be more efficient and cost-effective in terms of underwriting, servicing and claims handling as documentation will be reduced and common procedures can be established across all territories.

Another approach is to implement a fully stand-alone terrorism programme with a master policy in the home country, supplemented by local terrorism policies covering overseas subsidiaries.

A stand-alone terrorism programme should be structured with a master policy and local, in-territory policies. Such programmes can also provide an effective solution and can be considered where an integrated approach is not possible whether because of local regulations, lack of insurer capability to provide such a solution, or other technical reasons such as limit/exposure management.

It is important to note that using stand-alone terrorism policies, written on a “non-admitted” basis, with worldwide coverage being given under a single policy in the home country, exposes the purchasing company (and potentially its broker too), to some very real compliance challenges. These can arise due to the complex rules governing “non-admitted” insurance in general, as well as the terrorism-specific rules themselves.

The practical difficulties that arise from the handling of terrorism claims make it highly advisable to have a policy document in place that is in local language and in a form that is capable of relatively straightforward claims adjustment. This would, at a time when rapid business recovery is a priority, help to ensure that loss payments were made directly in-country under the local policy rather than to the parent company, which could then encounter delays and tax complications in moving the money to the impacted local subsidiary.

Piers Gregory is Global Product Head for Terrorism and Political Violence and Clive Hassett Director of Multinational Services at ACE Europe.

Piers Gregory
Global Product Head for Terrorism and Political Violence at ACE Europe

Clive Hassett
Director of Multinational Services at ACE Europe

In its recent report published in association with the UK risk manager association AIRMIC, ‘Property insurance: terrorism and political violence’, ACE highlights the importance of companies being aware of the nuances of cover and sets out a glossary of terms for the UK market in particular.