Morningstar DBRS acknowledged that the reinsurance industry remains well-positioned to absorb modest losses from terrorism and political violence due to strong capital and diversified underwriting portfolios, but warned that prolonged geopolitical and military tensions in the Middle East could increase underwriting volatility, tighten reinsurance terms and prompt more selective underwriting of political risks.
According to a new report from a ratings agency, people are most concerned about not only the likelihood of being attacked, but also how losses from multiple insurance programs stack up.
Morningstar DBRS notes that incidents of terrorism and political violence can trigger claims under both property, marine, aviation and business interruption policies.
The agency also stressed that it is becoming increasingly difficult to distinguish between terrorism, sabotage, cyber incidents and acts of war, which could increase the likelihood of coverage disputes.
The report explains that the global terrorism and political violence insurance market is highly specialized and concentrated among a small group of insurers and managing agents, often offered through Lloyd’s of London syndicates and specialist carriers.
“Political violence policies typically provide broader protection than stand-alone terrorism insurance, covering risks such as sabotage, riots, civil unrest, insurrection and politically motivated strikes. Through layered coverage involving multiple insurance companies, coverage limits and large commercial risks often run into the hundreds of millions of dollars,” the report said.
As expected, demand for these policies typically rises during times of geopolitical tension and social unrest.
The ratings agency said businesses with international exposure, including multinationals, airlines, logistics operators, infrastructure owners and hotel groups, are likely to reassess their risk management strategies and seek broader coverage amid the ongoing conflict in the Middle East.
At the same time, a prolonged geopolitical crisis may prompt insurers to reexamine pricing and underwriting terms, and politically sensitive assets may face higher premiums or lower limits.
As such, Morningstar DBRS emphasizes that reinsurers play a central role in determining the availability and cost of terrorism and political violence insurance.
“Reinsurers such as Munich Re, Swiss Re, Hannover Re and SCOR SE provide important capital support to the specialty insurance market. Their willingness to underwrite directly affects the ability of major insurers to underwrite the risk of political violence.
“If geopolitical tensions persist or escalate, reinsurers may respond by tightening underwriting standards, increasing attachment points or limiting underwriting capacity for certain high-risk exposures. This would increase retention levels for major insurers and could lead to higher premiums for policyholders.
“Reinsurance can also reassess its accumulation exposure across multiple lines and geographies. In times of geopolitical instability, managing accumulation is a key focus for reinsurers.”
Marcos Alvarez, managing director of Morningstar DBRS Global Financial Institutions Ratings, commented: “We believe the global insurance industry’s strong capitalization and diversified underwriting base should limit the immediate impact of geopolitical escalation.
“Nevertheless, prolonged hostilities may increase underwriting volatility and lead to more stressful conditions in certain specialty insurance markets, particularly for assets deemed to be politically or strategically sensitive.”
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