WPVT Rising: Q&A with Guy Carpenter’s Powell

War, political violence and terrorism (WPVT) , as well as Strikes, Riots and Civil Commotion (SRCC) exposures residing within other business, represent a heightened threat and a growth opportunity for re/insurers.

Jonathan Powell (pictured), managing director, non-marine specialty, at reinsurance broker Guy Carpenter, answered GR’s questions on this hot topic, within an unfolding era of geopolitical volatility.

What’s been the growth trajectory for standalone political violence (PV) and is it perceived as an opportunity among specialty insurers?

Pre 9/11 there was a very small standalone terrorism market mainly focussed on places like the UK (IRA) , Sri Lanka (Tamil Tigers) and Colombia (FARC). Post 9/11, property insurers excluded terrorism which created huge global demand. This became one of the most profitable lines of business given the relatively narrow coverage and lack of losses. Over time more capacity entered the market to take advantage of these returns, coverage broadened, and the market softened. From 2003/4 to 2020 rates were reducing and only increased in a more meaningful way post Russia’s invasion of Ukraine.

Today, the WTPV market offers coverage for an array of products including terrorism, strikes riots and civil commotion, war on land, mutiny, coup d’etat, active assailant, nuclear or cyber terrorism, terrorism liability, terror and threat event cancellation. The performance of this LOB over any time period during the last 22 years has been incredibly strong and contributed significant profitable income to Lloyd’s (where the vast majority of WTPV income is written) and the global insurance market.

Specialty insurers certainly still view this as an opportunity and post Ukraine we have seen more markets entering the space than exiting. This has sparked a race for talent in the space with the large lead markets needing resource to manage their high volume of accounts and small to medium players needing expertise for credibility. Some MGAs/startups have struggled to attract top talent in the past but there are some now offering a proposition that is seeing lead underwriters take on these roles. The current geopolitical climate means increased demand from both existing clients and those who previously did not buy. Our estimate of the WTPV market global income is $2.5bn.

Are PV aggregations becoming better understood and/or modelled by the re/insurance market, given the geopolitical mood music?

There has been a significant increase in focus, understanding and the granularity of information requested with regards to PV perils by the reinsurance market in recent years. In particular, this has focussed on SRCC following the surge in frequency and severity of riot events globally which are hitting mainstream media on a much more regular basis.

As such, both the reinsurance broking and underwriting communities have dedicated much more time and resource to studying the peril. As an example, a cedant’s portfolio will undoubtedly contain exposure to SRCC. However, to truly understand how exposed each risk might be to the perils in question, reinsurers are now requesting much more in-depth information in addition to the basics, such as location. For instance, what is the occupancy of the building in question? If it is a retail exposure, which are traditionally assumed to be more at risk of looting, what kind of retail does the insured participate in? Does the policy contain business interruption and contents coverage as well as physical damage? What level of attachment does this particular policy contain and what line size has the individual cedant deployed?

Such information is now more commonly requested in a bid to differentiate portfolios from one another in more detail. As event definitions have been called into question, particularly around SRCC, using this data to unlock greater insights into each individual portfolio in depth is absolutely integral from both an underwriting and a broking perspective.

Finally, with a growing number of historical events to validate assumptions and calibrate models, our industry is able to utilise the tools available traditionally reserved for more established perils, such as quake and windstorm for perils such as SRCC.

On ‘silent PV’ (SRCC that exists in treaty reinsured books). Are treaty reinsurers concerned about what I’d call ‘Silent PV’ – is there evidence in terms of their renewals of books that they may suspect harbour un-priced SRCC exposures?

This has been a concern in recent years and, coupled with an increase in social unrest and the hardening property market, has allowed reinsurers to exclude SRCC. A large number of property re/insurers now have gaps or no cover at all for SRCC within their own treaty/retro placements meaning reinsurer concerns have been addressed through exclusions. This has sparked some interest in purchasing SRCC specific cover as well as a need to properly price, aggregate and manage this exposure within a property portfolio.

Somewhere like Chile, we saw standalone direct and facultative (D&F) PV emerge from excluded SRCC exposures in loss-hit property / all-risks books. But this shift hasn’t yet occurred in bigger markets (e.g. the US, the UK and France, despite civil unrest). Do you think more broadly that the market could go in the same direction as the Chilean example?

International property D&F markets have had more success at excluding SRCC perils post large loss events so if another country experienced significant losses like Chile did, we could see a further flow of business into the PV market.

In the US after both Black Lives Matter and the rioting following the death of George Floyd, there was an expectation SRCC would be excluded but this did not materialise. One reason is that domestic insurers are subject to state laws, and some cannot unilaterally amend coverage forms at short notice so the coverage remains in place. This can mean anyone looking to exclude the cover is at a competitive disadvantage in terms of their offering. Other markets then struggle to compete if they are not providing SRCC coverage. As a result, up to now, this remains a staple part of the coverage for US business.

Property markets did exclude a handful of accounts such as loss-affected retail or pharmacies which were shown to PV markets but these were very small in number. In the UK SRCC remains very much a part of the property market offering and actual property damage losses have been relatively insignificant so there is no current move to pass it towards the PV market. France has experienced more meaningful property damage losses from riots, but these were mostly retained in the property market.

On standalone PV market growth. Western multinationals tend to buy standalone PV if they have assets in frontier/emerging markets – but are some also looking to buy it with a view to risk in their home markets in western countries?

Historically multinationals were buying the broader perils for their emerging market exposure but perhaps the terrorism element was still necessary for the more western locations. Given the rise in SRCC events globally, having coverage for these perils will also be valuable wherever they have exposure. This means buyers will still purchase but the coverage afforded is providing more value to them as its impossible to predict where and when you will need the various coverages to protect your assets. The product is working harder for them.

From a standalone D&F PV insurer perspective, are they buying treaty reinsurance for PV with different retentions, structures or volumes than they did, say, a year or two ago?

Retentions went up post Ukraine for almost everyone and given the majority of markets have had growth in their plans since, it does not appear likely these will reduce at 1/1. We certainly saw more standalone purchased in the last two years as marine composite reinsurers removed coverage beyond standard terrorism perils from placements or if they were giving PV, this was only permitted in high layers, probably excess of a max risk line.

Reinsurers have started to differentiate more since the post Ukraine correction of pricing and T&Cs. Depending on a client’s strategy, appetite, line and aggregate deployment and management of conflict zones, we are seeing terms better aligned to book composition. Rather than the broad-brush approach of 2022 renewals, D&F underwriters of WTPV require reinsurance to facilitate them offering the line size and aggregates necessary to compete in this line of business. Very few insurers write this class on a net basis without reinsurance.

From a treaty reinsurer perspective, is there capacity availability to reinsure standalone PV; what are the dynamics for reinsurance supply/demand, pricing and conditions?

Supply of capacity is fairly static, but those in the space are keen to continue and most want to grow. The non-correlating speciality classes are an attractive diversification to writing property cat. That said, there have been more occasions of late in which SRCC/PV events have followed in areas of natural catastrophe, showing that it might not be as non-correlating as once thought e.g. post Hurricane Otis.