As property insurers lock up their July 1 reinsurance renewals, many are finding a bonus surprise above and beyond the soft pricing environment – the terrorism exclusions that have been standard in reinsurance contracts for the past decade are, in many cases, being completely done away with.

Writing in the Financial Times, Alistair Gray notes:

Reinsurers, which backstop conventional insurers, are agreeing to withdraw the terrorism exclusion clauses that they insisted on after the insurance industry lost about $40bn from the al-Qaeda hijackings of 2001.

Gray also quotes Moody’s Senior Credit Officer Kevin Lee noting that, while the “technology for modelling terrorism risk has improved greatly” since 9/11, the current trend “is largely driven by greater bargaining power among reinsurance buyers.”

A flood of institutional capital into the reinsurance sector – particularly to insurance-linked securities and other forms of collateralized reinsurance – has made it increasingly difficult for traditional reinsurers to find attractive prices in the market that long has been their bread and butter, the North American property catastrophe market. June 1 renewals, which are dominated by contracts covering property risks in Florida, saw rates on line fall by between 12.5 percent and 20 percent, and similar declines of up to 20 percent are expected for the July 1 renewals.

While there remain skeptical observers who feel the tide of institutional money could reverse itself, either in the wake of a significant catastrophe or once the market for fixed-income securities once again begins offering more normal returns, general sentiment is moving toward the conviction that the new money is here to stay. As Lara Mowery, global property specialty leader at reinsurance broker Guy Carpenter, put it in a recent Q&A:

There are things out there that will shape the space going forward, but I think the dynamics in terms of this capital coming in and the way that reinsurers and insurers are reacting is a longer-term proposition now. People are becoming more comfortable that this isn’t fleeting capital.

All of which should be taken as support for the approach taken in the U.S. House toward extension of the Terrorism Risk Insurance Program, including raising the trigger level for conventional terrorism to $500 million. Guy Carpenter recently issued a report finding that multiline terrorism reinsurance capacity is about $2.5 billion per program for conventional terrorism and about $1 billion per program for coverages that include nuclear, biological, chemical and radiological risks.

Those trends already supported raising the program’s trigger level from the current $100 million. With a growing number of reinsurers offering to include terror cover as part of an overall reinsurance program, that further strengthens the argument that the private market is ready and willing to take on more risk than it has in the past, and that the government should ensure that it does not crowd out the capacity that is coming on line.

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