From tangible to intangible
A brief history of the Terrorism Insurance market.

Moving with the times

Prior to 9/11, the market for stand-alone terrorism insurance was limited to providing solutions for property owners and trade/investment exposures in countries with elevated terrorism risk.
Separately there were several local pooling solutions to address domestic terrorism – including Pool Re, Sri Lankan Pool, SASRIA, Consorcio. The largest providers, outside of the pools, were Lloyd’s of London (Lloyd’s) and American International Group (AIG) with whom limits of up to US$200m could be built. The market has evolved rapidly post 9/11.
William Farmer's profile picture
William Farmer
Strategic Head of Crisis
Management & Special Risk,
AXA XL
About the author
1936
17 July 1936
Start of the Spanish Civil War
1937
Waterborne Agreement
precluded Lloyd’s underwriters from insuring land-based war risks.
1980's
Iran- Iraq conflict
IRA active
Numerous bombings in London and across the UK. (Northern Ireland has a different scheme)
We start to see the beginning of Islamic Terrorism (ex WTC 1 - 1993).
1980's
Skandia International leads Arab War Risks Insurance Syndicate (due to Iran-Iraq conflict).
Terrorism was generally included/ silent on commercial property insurance.
LPO 437 was released 1982 and covered Terrorism and Riots, Strikes and Civil Commotion.
1992
10 April 1992
Baltic Exchange Bomb, City of London.
IRA - 3 people killed and damage of £800 million.
1993
24 April 1993
Bishopsgate Bomb, City of London
IRA - £350m of damage.
Beginning of Islamic Terrorism
(ex. WTC 1 - 1993).
1993
Pool Re was established in reaction to the market failure triggered by the Baltic Exchange bombing.
Pool Re pays out £262m (largest claim to date) after Bishopsgate bombing.
1997
Lloyd's offers stand-alone war on land - Lloyd's 667 Wording.
2001
September 11th, 2001 Attack on Twin Towers, New York, Pentagon killing 2,976 people and causing circa $35bn insured loss.
2001
Multiple claims came in on policies where Terrorism was silent.
Terrorism Exclusion Clauses introduced - NMA2918 etc.
Map Syndicate (Lloyd's) released the T3 Wording (a standalone Terrorism policy). T3A - BI Extension Introduced
2002
January 1st 2002, Treaty Reinsurers exclude Terrorism.
TRIA 2002 – (US based)
requires US insurers to offer terrorism coverage with Govt. backstop.
Various country Pools established 2002
France - GAREAT
Germany - EXTREMUS
Australis - ARPC
(India/ Netherlands/ Denmark/ Belgium and others came later)
July 2002 Pool Re was extended to an 'all risks' basis (no longer restricted to fire or explosion and CBRN exclusions were removed)
2004
11th March 2004
Attack on commuter trains in Madrid, Spain, killing 192 people.
2005
7th July 2005
Attack on London tube trains and buses, killing 52 and injuring hundreds.
2004
Beazley Syndicate releases full PV wording.
2005
TRIA 2002 Extended (becomes TRIEA 2005).
2010-2011
Arab Spring
2006
London Market produces updated version of T3 - LMA3030 (Includes sabotage).
Catlin Syndicates offer stand-alone NCBR coverage.
2007
TRIEA 2005 Extended (becomes TRIPRA 2007) - Terrorism Risk Insurance Program Reauthorization Act of 2007
2010
Policies purchased didn’t fit the problems posed by the Arab Spring. T3 and LMA3030 were built with properties and cities in mind.
2011
LMA 3092 full PV wording introduced.
2013-2016
An increased number of attacks on ‘soft’ targets These attacks can be carried out with guns, knives or via vehicles. Examples include:
2013: Westgate Shopping, Kenya
2014: Sydney café siege
2015: Charlie Hebdo, Paris
2015: Bataclan,Paris
2015: Sousse Beach, Tunisia
2016: Orlando Nightclub, USA
2016-2017
A series of attacks using vehicles across Europe (8+ attacks including:
Nice France: 86 killed, 434 injured
Berlin: 12 killed, 56 injured
Westminster: 5 killed, 32 injured
Stockholm: 5 killed, 14 injured
London Bridge: 8 killed, 45 injured
Barcelona: 16 killed, 152 injured
2015
TRIPRA 2007 extended and becomes TRIPRA 2015
2017
Introduction of niche products to market such as: Active Assailant, Threat and Loss of Attraction, Terrorism Liability and Contingent BI. Policies extended to include Vehicle Ramming
Cyber extensions selectively available.
2018
April 2018 Pool Re lifts its cyber exclusion and announces intention to offer NDBI reinsurance.
Timeline events
1936
  • 17 July 1936 - Start of the Spanish Civil War.
1937
  • Waterborne Agreement precluded Lloyd’s underwriters from insuring land-based war risks.
1980's
  • Iran- Iraq conflict
  • IRA active
  • Numerous bombings in London and across the UK. (Northern Ireland has a different scheme)
  • We start to see the beginning of Islamic Terrorism (ex WTC 1 - 1993).
  • Skandia International leads Arab War Risks Insurance Syndicate (due to Iran-Iraq conflict).
  • Terrorism was generally included/ silent on commercial property insurance.
  • LPO 437 was released 1982 and covered Terrorism and Riots, Strikes and Civil Commotion.
1992
  • 10 April 1992 - Baltic Exchange Bomb, City of London.
  • IRA - 3 people killed and damage of £800 million.
1993
  • 24 April 1993 - Bishopsgate Bomb, City of London.
  • IRA - £350m of damage.
  • Beginning of Islamic Terrorism (ex. WTC 1 - 1993).
  • Pool Re was established in reaction to the market failure triggered by the Baltic Exchange bombing.
  • Pool Re pays out £262m (largest claim to date) after Bishopsgate bombing.
1997
  • Lloyd's offers stand-alone war on land - Lloyd's 667 Wording.
2001
  • September 11th, 2001 Attack on Twin Towers, New York, Pentagon killing 2,976 people and causing circa $35bn insured loss.
  • Multiple claims came in on policies where Terrorism was silent.
  • Terrorism Exclusion Clauses introduced - NMA2918 etc.
  • Map Syndicate (Lloyd's) released the T3 Wording (a standalone Terrorism policy). T3A - BI Extension Introduced
2002
  • January 1st 2002, Treaty Reinsurers exclude Terrorism.
  • TRIA 2002 – (US based) requires US insurers to offer terrorism coverage with Govt. backstop.
  • Various country Pools established 2002
    • France - GAREAT
    • Germany - EXTREMUS
    • Australis - ARPC
    • (India/ Netherlands/ Denmark/ Belgium and others came later)
  • July 2002 Pool Re was extended to an 'all risks' basis (no longer restricted to fire or explosion and CBRN exclusions were removed)
2004
  • 11th March 2004 - Attack on commuter trains in Madrid, Spain, killing 192 people.
  • Beazley Syndicate releases full PV wording.
2005
  • 7th July 2005 - Attack on London tube trains and buses, killing 52 and injuring hundreds.
  • TRIA 2002 Extended (becomes TRIEA 2005).
2006
  • London Market produces updated version of T3 - LMA3030 (Includes sabotage).
  • Catlin Syndicates offer stand-alone NCBR coverage.
2007
  • TRIEA 2005 Extended (becomes TRIPRA 2007) - Terrorism Risk Insurance Program Reauthorization Act of 2007
2010
  • Policies purchased didn’t fit the problems posed by the Arab Spring. T3 and LMA3030 were built with properties and cities in mind.
  • Arab Spring
2011
  • LMA 3092 full PV wording introduced.
  • Arab Spring
2013-16
  • An increased number of attacks on ‘soft’ targets These attacks can be carried out with guns, knives or via vehicles. Examples include:
    • 2013: Westgate Shopping, Kenya
    • 2014: Sydney café siege
    • 2015: Charlie Hebdo, Paris
    • 2015: Bataclan,Paris
    • 2015: Sousse Beach, Tunisia
    • 2016: Orlando Nightclub, USA
2015
  • TRIPRA 2007 extended and becomes TRIPRA 2015
2016-17
  • A series of attacks using vehicles across Europe (8+ attacks including:
    • Nice France: 86 killed, 434 injured
    • Berlin: 12 killed, 56 injured
    • Westminster: 5 killed, 32 injured
    • Stockholm: 5 killed, 14 injured
    • London Bridge: 8 killed, 45 injured
    • Barcelona: 16 killed, 152 injured
2018
  • April 2018 Pool Re lifts its cyber exclusion and announces intention to offer NDBI reinsurance.

Today's market capacity and number of players

From a ‘per risk’ capacity point of view, the direct market began to settle in 2004 with about US$1bn. There has been incremental growth since 2004 driven by existing underwriters increasing their capacity, and some new entrants – especially in Lloyd’s. Currently ‘per risk’ global capacity stands around US$2bn.
The stand-alone terrorism market is small compared to the global property insurance market (approximately US$1.5bn capacity for any one risk, compared to over US$6bn for property all risks). To make best use of available capacity, ‘first loss’ policies are the norm with limits normally ‘aggregated’.
Despite large pricing reductions, premium has increased significantly since 2002, peaking in 2014. Despite ‘HIM’ (Natural Catastrophe events in late 2017), soft conditions prevail in 2018.
Estimated Global Terrorism Premium (US$m)

Changes in demand

In the early days after 9/11, the US market contributed more than 50% of worldwide stand-alone terrorism premium. This share has declined (post Terrorism Risk Insurance Act) to around 30% but the US is still by far the most significant market. Demand is well spread globally; typical buyers are larger and multinational companies. Penetration is notably strong in Canada, Mexico, Scandinavia, Ireland, Turkey, Singapore, Hong Kong, India and UAE. A robust stand-alone market has also developed to compete against or complement local Government-backed pool arrangements in the UK, Germany, Israel, South Africa and the Far East.
Factors that have contributed to increase demand include:
  • Better distribution and product awareness
  • Risk perception – terrorism is rarely out of the news
  • Reduced pricing
  • Stronger corporate governance globally
  • Broader coverage and flexible wordings
  • Political Violence and War extensions becoming widely available
  • E trade portals for SME business
50%
US market contribution of worldwide stand-alone terrorism premium, post 9/11.

Products to address changing environment

T3/LMA3030 based stand-alone terrorism policy wordings were born out of demand post 9/11. The focus was to cover property damage and consequent business interruption from catastrophic/major attacks.
The spate of attacks in the UK, France, US, Belgium, Spain, Germany in the past three years has not resulted in any knee jerk reaction on pricing or capacity – partly because losses paid have been low relative to the annual premium. Conversely, the stand-alone market has been very quick to offer new products to address the changing ‘peril landscape’. Key new products and product enhancements on offer include:
  • Non Damage Business Interruption (NDBI) extensions – see expanded section below
  • Policies that can be triggered by Bodily Injury as well as property damage
  • Follow form wordings - following ‘broadform’ property policies
  • Extensions for malicious acts, workplace violence that are not certified as terrorism
  • Terrorism and active assailant liability
  • Cyber Terrorism and malicious cyber extensions
Several solutions were brought to market. ‘Active Assailant’ policies remove any grey area surrounding the motive of attack, and will trigger if there is bodily injury (in addition to triggering if there is property damage). This type of policy can be sold as stand-alone coverage or as an extension to a property damage policy.
The spate of attacks in the UK, France, US, Belgium, Spain, Germany in the past three years has not resulted in any knee jerk reaction on pricing or capacity.
Quote style

Business Interruption and Non Damage Business Interruption (NDBI)

The socio-economic climate differs to that 17 years ago. To show the scale of this difference in 1975 83% of the value of the S&P 500 came from Tangible Assets (structure, equipment, property); in 2015 this number fell to 13% – with 87% of all value coming from intangible assets such as brand, customer databases, reputation, employees, IP, R&D and technology.

Swing of S&P 500 Index value from tangible to intangible assets 1975-2015 (%)

1975
2017
17% Intangible assets. 83% Tangible assets.
13% Intangible assets. 87% Tangible assets.
Property damage is typically not the largest concern of a company. Business interruption following property damage can have a huge effect on the top line, but the same event might have unspecified long-term effects on the brand.
Terrorism events are often critical to a country’s security as well as being highly emotive and politically charged events. This can result in significant disruption due to cordons, post-event investigations and lock-downs. The events at Borough Market in London (3 June 2017) and aftermath are a key example.
Terrorism policies and extensions have a relatively short history and started out as very basic property coverage, often with little or no coverage for NDBI. Coverage has broadened to include the likes of ‘denial of access’ of ‘incoming utility’, ‘supplier and customer’ extensions. Other NDBI extensions such as ‘Loss of Attraction’ and ‘Threat’ have become more widely available since 2017.
Loss of Attraction cover will trigger if a peril covered under the master policy occurs at a scheduled attraction property or at a location within a stipulated radius of the insured property, which subsequently results in a measurable downturn at the Insured’s premises.
Threat cover will trigger if there is a specific threat against the insured to inflict bodily injury to any employee, or contractor, or threat to damage, destroy or contaminate any property at the scheduled location. Cover can also be triggered if there is a threat against any director, partner or officer.
Extended Extra Expense cover is available as well. Extra expense can include, public relations costs, relocation expenses, counselling and or psychiatric care costs, medical expenses, job retraining costs, recruitment costs, forensic accounting and temporary security costs. Coverage will assist in rehabilitating any damage to brand and ensure duty of care responsibilities are met.
Pool Re has taken a lead in UK in seeking to extend coverage to include NDBI within a radius of the insured location.
Business interruption following property damage can have a huge effect on the top line, but the same event might have unspecified long-term effects on the brand.
Quote style

Attracting SME buyers

Most terrorism purchases are voluntary and price sensitive. Pools that are mandatory or dominant in the local market (such as GAREAT, ARPC, NHT) have fewer issues around anti-selection. Non mandatory pools and stand-alone insurers have to work hard to attract SME clients. The challenge is that no insurer wants a portfolio made up of the worst risks and trophy buildings clustered in the top accumulation zones. This was probably acceptable in the stand-alone market of 2002/2004, but the distressed pricing was never going to last.
There are several reasons why SME businesses are less inclined to buy terrorism coverage:
  • Perception that the business is not a target
  • Lower level of corporate governance
  • Mortgage covenants on property less onerous than for large loans
  • Lack of awareness of products available
  • The ‘vanilla’ terrorism products not being suitable
  • SMEs not approached by brokers and insurers due to relatively low premiums
Recent events, including the aftermaths of Borough Market (3 June 2017), Westminster (22 March 2017), Boston Marathon bombing (15 April 2013) have illustrated that SME business may not be targeted but can suffer badly from being in the vicinity of an attack.
Pool Re is in the vanguard of work to attract more SME buyers. This includes offering improved risk related pricing, providing meaningful NDBI extensions (launching soon), initiatives to encourage good risk management and improving access to the product via marketing campaigns
Recent events have illustrated that SME business may not be targeted but can suffer badly from being in the vicinity of an attack.
Quote style

Challenges for the Terror/Political Violence market on the near horizon

Drones are certainly a realistic delivery method for small IEDs. Existing terrorism policies cover use of drones, but it is doubtful that drones are specifically factored in to pricing models.
CBRN (Chemical, Biological, Radiological, Nuclear) attacks remain a major concern but is not a threat that has emerged recently. Capacity in private markets remains very limited with only a handful of direct insurers offering products. Government pools (Pool Re, GAREAT and ARPC in particular) are able to offer large limits by virtue of strong capitalisation, reinsurance and Government backstops. Drones might be an effective means of delivering Chem/Bio/Radioactive agents. Drone technology for agricultural spraying is advancing rapidly and could be used to devastating effect if terror groups can obtain a suitable chem/bio agent.