Terror Threats Strain Insurance Capacity
By Iris Lai
After the Mumbai terrorist attacks last November, terrorism activity has intensified in South Asia, as illustrated by the recent deadly attacks in Sri Lanka and Pakistan, further exposing the vulnerability of the region.
Increasing terrorist attacks may lead to price hikes for terrorism insurance, and hence, the issue of affordable protection. “Insurers need to be aware of the heightened risk to soft commercial targets in the major cities,” said Gordon Woo, a terrorism risk expert at RMS, a risk modeling company. Hotels and transportation systems with open public access are prone to terrorist attacks.
The incidents continue. On March 10, a rebel suicide bomber associated with the Tamil Tigers attacked a procession that was part of a Muslim celebration in southern Sir Lanka, killing 14 people and wounding a government minister.
In Lahore, Pakistan, a few weeks ago, at least a dozen gunmen attacked a bus carrying the Sri Lankan cricket team, killing eight people including six policemen.
‘Bleak’ Outlook
The near- and medium-term terrorism picture for South Asia is bleak, said Steve Vickers, president and chief executive of FTI-International Risk, an international risk mitigation and investigation company. “While the situation in Pakistan is of extreme concern, the spillover into India makes the terrorism problem an increasingly regional issue,” Vickers said.
Also, the Pakistan and Indian governments are “ill-prepared” to prevent future terrorist attacks, said Vickers. The Mumbai hotel attacks last November and a series of suicide bombings in Pakistan, including the one that killed former prime minister Benazir Bhutto in December 2007, had demonstrated “the severe limitations” of their capabilities in terms of intelligence, training, equipment and coordination, he said.
A “volatile mix of terrorism and worsening India-Pakistan tensions” and ineffective response to combat spiraling violence in the region have created “a potentially combustible situation,” according to FTI-International Risk’s report on terrorism trends in Asia.
There is “a high probability of another terrorist attack in India between now and May” before the general election, said Vickers. Business activities should be “mindful of the volatile environment” and “exposure to unnecessary risks should be minimized,” added Vickers.
The high risk exposure to terrorist attacks and frequent occurrences in South Asia may provoke hardening in prices for terrorism coverage particularly for multinational properties.
Terrorism mitigation depends crucially on security enhancement. Woo noted the instability of Pakistan makes it unlikely that there will be significant improvement soon.
“Pakistan terrorism risk premiums reflect terrorist targeting and are high for buildings which involve American interests, multinational companies’ offices, five-star hotels and buildings situated close to army bases,” said Woo.
Since a bombing at the Islamabad Marriott in September 2008, terrorism insurance premiums have increased “multiple-fold and are expensive” in Pakistan, said Woo.
Terrorism risk is much higher in Pakistan but property insurance capacity is limited by the scarcity of international reinsurance, said Woo. The stated-owned Pakistan Reinsurance Co. Ltd. [88881] plays an important role in sustaining the market.
The terrorist attacks in Pakistan and India have seen many civilian casualties. In Pakistan, the public’s worry over terrorist attacks against civilians has boosted life insurance market as sales of the public insurer rose by about a third in one year, said Woo.
State Life Insurance Corporation of Pakistan [88882] saw a 34% jump in new insurance business and an 85% rise in total in-force premiums last year, said its chairman, Shahid Aziz. The threat of terrorism attacks should not be a direct factor for the growth, but it may have a “psychological” influence, Aziz said.
Last year’s life premium growth was “a historic phenomenon” for State Life, which accounted for 70% of market share for a Pakistani life sector with one public and five private life insurers, said Aziz. The growth was mainly driven by the public insurer’s ability to offer full government-guaranteed policy protection for customers’ concern on financial reliability during economic downturn.
Terrorism Backstops
In India, Woo said the country is exposed to a “moderate terrorist threat” and should see an expansion of terrorism insurance coverage. A terrorism pool, which was set up after the Sept. 11, 2001, terrorist attack and managed by General Insurance Corporation of India [86041], took a “sizable loss” on the Mumbai hotel attacks and “will be expanded.”
In Pakistan, there has been discussion of a terrorism pool but the “high risk level makes this problematic,” said Woo.
After the Islamabad Marriott attack last year, Woo said reinsurance for Pakistan terrorism risk “has been hard to get” and the latest cricket-team attack in Lahore “will exacerbate” this situation. “National security has to be improved for the insurance market to be able to cover terrorism at an affordable price,” he said.
The cricket-team attack highlighted “the vulnerability of sporting events to terrorist disruption,” said Woo. “With concern rising over copycat attacks on other major sporting events, insurance coverage for such events is liable to become increasingly expensive.”
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