How the Iran war affects insurance coverage for terrorism

Military actions in the Middle East may hike terrorism risk globally, and could have repercussions for civilians and businesses, note two new reports from insurance industry analysts.

“Major conflicts have historically increased the risk of retaliatory or politically motivated violence outside the immediate conflict zone,” says a Morningstar DBRS commentary released today.

It notes U.S.- and Israeli-led attacks on Iran have sparked broader regional conflict, which could lead to attacks on infrastructure, commercial buildings, diplomatic facilities and other locations. “North America and Western Europe are likely to remain the most exposed regions outside the Middle East because of their concentration of high-value insured assets and symbolic targets,” the report says.

Echoing those concerns, a March 18 Marsh report looks broadly at terror risks, pointing out military interventions that result in civilian casualties can “create conditions that increase terrorism,” by bolstering propaganda used to radicalize and recruit people to terrorist movements.

Related: Will U.S. political risk insurance help restart oil traffic?

“The destruction of infrastructure worsens economic instability and can also result in increases in terrorism group recruitment as factions gain local sympathy or legitimacy,” the report adds.

Marsh’s report also identifies a shift in terrorists’ tactics away from highly coordinated attacks like the 2001 destruction of New York’s World Trade Center toward less sophisticated assaults like 2025’s Bondi Beach shootings in Australia that are perpetrated by lone actors or decentralized cells.

Those incidents, along with cyber attacks on civilian or business infrastructure, effectively sew chaos and damage social cohesion. Workplaces and public venues can be viewed by terrorist actors as soft targets for gun violence, use of explosives, and fomenting civil unrest, Marsh’s report says.

Options for Canadian coverage

Unlike many countries, Canada remains plagued by the lack of a government backstop to support the insurance industry following a terrorist attack.

In the weeks after 9-11, Canada’s P&C insurance industry raised the idea of a federal backstop for terrorism coverage to fill gaps if the re/insurance market dropped out due to unsustainable costs. Initial proposals advocated a temporary measure to protect Canada’s market until capacity returned.

Six years passed before it became clear Canada would not follow global peers in creating a backstop. A mid-2007 Guy Carpenter report noted, “The Canadian government felt insurers had not shown a willingness to commit a sufficient percentage of their assets to any proposed program.”

It added that, for primary policies, many Canadian insurers opted to exclude terrorism from commercial property policies written on an ‘all-risk’ basis. One concern centred on fire following an event, along with the idea of excluding it from those policies.

Related: How Iran war may change client conversations

That contention resurfaced a few years later when Alberta’s government considered amending its provincial Insurance Act to prohibit insurers from excluding fire claims following a terrorist attack or earthquake. Both the Insurance Bureau of Canada and Reinsurance Research Council of Canada noted at the time that such a change would increase insurers’ insolvency risk.

By the time of the 2014 ramming attack on a soldier in Quebec and the shooting attack on Parliament Hill by separate suspects who appeared to have radical ideologies, efforts to exclude terrorist attacks from commercial insurance policies in Canada had expanded. One commentary written for Canadian Underwriter at the time, however, argued those policy limits have never been truly tested.  

Further, some commercial coverages may be able to skirt strict definitions in many policies specifically designed to cover terrorism. One political and security coverage expert noted in a spring 2021 interview with CU that coverage for ‘malicious attack’ could include a broader range of incidents and could fill gaps left by standard terrorism policies.

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State of the market

When geopolitical tensions rise, demand for political risk and terrorism coverage tends to increase, Morningstar DBRS’s report notes.

“Businesses with internationally exposed operations, including multinational corporations, airlines, logistics operators, infrastructure owners, and hospitality groups, may re-evaluate risk management strategies and seek broader coverage,” the report says.  

That’s led to a competitive market in recent years, and extra underwriting capacity has “entered the political violence sector.” But, the report adds, a long-term crisis could prompt insurers to re-visit pricing and coverage terms. Further, it could downshift the reinsurance market’s appetite for this risk.

And, the authors of the Marsh report say, “If all-risk property premiums rise significantly, the absolute cost of terrorism endorsements also rises because the endorsements are typically priced as a percentage of all-risk premiums, making them less attractive to budget-constrained buyers.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.