28 November 2014 Insurance

Counter-terrorism bill unlikely to impact ratings

Rated insurers are unlikely to be impacted by amendments to the Counter-Terrorism and Security Bill in the UK which would make it illegal for insurers to reimburse ransom payments made to terrorist organisations.

This is according to rating agency AM Best which explained that as kidnap and ransom (K&R) insurance in areas affected by terrorism tends to represent a small proportion of the overall portfolios of London Market insurers, it doesn’t anticipate taking any rating actions on insurers in response.

In addition, K&R insurers are prohibited by the United Nations from paying or reimbursing ransoms to proscribed terrorist organisations and policies typically exclude such payments.

Insurance for K&R is primarily underwritten in Lloyd’s, with the London Market accounting for approximately half of premiums.

“In recent years, this business has proved attractive to specialist underwriters following a spike in rates in the wake of increased kidnapping and demands for ransom payments by Somalian pirates, particularly in the Gulf of Aden,” said Catherine Thomas, director, analytics at AM Best.

“The new terrorism bill is not expected to be detrimental to the business model of K&R insurers. While insurers generally provide cover for reimbursement of ransom payments under K&R policies, only a small proportion of policies are in regions where terrorist activity occurs.”

Yvette Essen, director, industry research - Europe & Emerging Markets at AM Best and author of the briefing, added: “Rates rose significantly in response to an increase in piracy in the Gulf of Aden five years ago, and steps were taken to reduce activity. In the past few years, the more established K&R participants have increasingly focused on risk management to prevent kidnappings from occurring in the first instance. While kidnapping is still common in Latin America and is growing in Africa, especially in Nigeria, rates have softened in recent years, given the reduced number of claims.”

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