The recent terrorist attacks in Paris, Nice and Brussels will prompt big changes in insurance demand, according to KPMG.
Research to be published by the consultancy this week will show that demand for political risk insurance is set to grow strongly over the next three years. The types of risk clients face are changing, however.
“There is a shift in the nature of terror,” says KPMG partner Paul Merrey in London. “In the 1990s it was about property damage. The incidents we’re seeing now are about maximising casualties.”
“In 2015 the global cost of terrorism was $32bn, but the indirect cost was much higher. If you look at the Paris incident, business interruption costs were $12bn,” he adds.
Business interruption coverage is often linked directly to property damage. Policyholders generally cannot claim for the economic costs of an attack unless their property was directly affected. But, says the KPMG report, the recent wave of attacks has created economic damage while leaving properties relatively unscathed.
The challenge that insurers face is working out the direct link between a terrorist incident and lost business. “There are a lot of things that could cause people to cancel their travel arrangements and you could pick up things that have nothing to do with political risk,” says David Anderson, head of political and credit risk at ZurichInsurance.
Mr Merrey says insurers will have to find a way to deal with the issue. “There is a gap between what insurers are providing cover for and what customers actually need. We see an opportunity for the industry as a whole to collectively find solutions for this.”
Despite the limitations, demand for cover for political risk is expected to grow strongly, at a time when more traditional areas of insurance, such as marine, aviation and property, are suffering from flat demand and falling rates.
Mr Anderson says that Zurich’s business in the wider political risk market grew 8 per cent last year, although activity this year has been subdued because low commodity prices have pushed down global trade volumes.
According to KPMG, the political risk and crisis management insurance market was worth $8bn last year, but the consultancy expects it to grow by a quarter to more than $10bn in 2018.
Much of the growth will be driven by demand for cyber insurance, which has grown at 40 per cent a year for the past five years. “There were 3.4m cyber incidents in 2009 and 43m in 2014, and the costs of incidents are becoming very significant,” says Mr Merrey.
Source: Financial Times