The nature and effects of the recent terrorist attacks in London and Manchester are broadening the industry's understanding of terrorism insurance, and could result in a permanent shift away from policies based on damage to property.
Traditionally, terrorism policies have tended to kick in when there is damage to the property of the insured. But the real damage caused by the 'lone wolf'-style tactics adopted by the attackers at Westminster, Manchester Arena and London Bridge was loss of life, injuries and significant disruption to local businesses. So-called 'denial of access' cover, for example, tends still to be linked to property damage.
Insurers must therefore focus on how business interruption cover is being extended beyond the realm of property damage. The development of contingent business interruption cover in response to recent earthquakes and floods that have affected global supply chains is a good example of an alternative approach, although even here there has to be an element of damage to the supplier of a business, if not to the business itself.
We are seeing the growth of business interruption products such as those available in the cyber market in relation to data breaches that lead to loss of profits and other intangibles. However, these products are still in the relatively early stages and need further development.
A recent report by Pool Re, the UK's government-supported terrorism risk reinsurer, described as "unprecedented" the three recent attacks in the UK.
Pool Re's analysis found that the attacks had many common features. All of them were undertaken by Islamist extremists and have been claimed by Daesh, although the claims have not yet been corroborated. All three attacks took place in crowded places, including tourist locations and social venues, where civilians were going about their day to day lives. The attacks seemed to be timed to maximise casualties, and civilians were indiscriminately targeted regardless of age, gender or nationality.
Attacks of this nature would have been completely unforeseeable when Pool Re was established in 1993, in response in part to the IRA bombing of the Baltic Exchange in London in April 1992. That attack, which killed three people, destroyed the Exchange building and caused huge property damage in the centre of the City of London.
In those days, terrorists used bombs and sophisticated weapons and acted together. As a result, insurers continue to view terrorism risk as the risks of an organised plot or threat for doing damage to property. The result is a recognised 'insurance gap' for business interruption arising for non-property damage.
The recent examples show how substantial that gap could be. The Insurance Insider (registration required) has estimated the value of Ariana Grande's claim for cancelled tour dates in London and mainland Europe following the Manchester Arena bombing at £300,000. Take That, who had to cancel three shows due to take place at the Manchester Arena that same week, could receive between £500,000 and £1 million to cover the cost of rescheduling the shows, according to the same report. Although property damage to the arena itself is likely, the cost of business interruption - particularly due to the closure of Manchester Victoria train station for a week - will ultimately be far more significant.
The question now is how quickly insurers might be able to adapt to these new realities. However, the global insurance market is not renowned for its speed of movement. Theresa May's government has tried to be quick to shape its regulatory approach to the needs of the insurance market - see, for example, its move to make it easier to underwrite insurance linked securities (ILS) in London - but political uncertainty following the recent election result, and the pressures on the government to negotiate the terms of Brexit, is likely to impact on future initiatives.
Nick Bradley is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com.