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Terrorism market softens despite high alert

The terrorism reinsurance market is currently oversupplied with capacity but this could quickly shift in the event of a major loss, broker Guy Carpenter warned last week.~

Marsh & McLennan Companies' reinsurance arm estimated there was $6bn-$8bn of terror reinsurance capacity currently available in the US market, some of which is unused because a terror-exposed government fund does not purchase cover.

"Reinsurance capital allocated in support of terror risk is likely to continue to be limited and defined given the uncertain nature of this peril," the report noted.

Despite the oversupply, prices have stabilised after a period of decline because property catastrophe losses have reduced the pool of reinsurance capital available to underwrite high-level but rare events.

However, this may not last. "Barring further significant capital depletion, the oversupply of terrorism reinsurance globally is expected to stifle price increases in terrorism, even if other lines experience upward pressures," the report claimed.

Models supporting terrorist risk underwriting are still in their early stages of development.

Paul Knutson, head of terror risk specialty at Guy Carpenter, said the dynamic, uncertain nature of the risk required a different approach to risk management and thus a different approach to transferring risk to the reinsurance market.

Terrorist attacks are becoming increasingly diverse and dispersed in nature, the report said, with a trend towards more localised plots.

The number of terrorist attacks peaked at more than 14,400 in 2006, with only a slight dip in frequency over the past five years.

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