In this month's newsletter, we outline how Connected Risk will transform Regulation
Insurers and Airlines are susceptible to Terror Risks
24 November 2015 | Blog Post
The second Paris massacre has hit travel and tourism stocks as financial markets had their first chance to react to the worst terrorist atrocity in Europe for more than a decade. A 2010 study found that US government bond market and bank stocks were the least-susceptible type of investment to terrorist incidents while the insurance sector and airline industry were the most sensitive.
In the wake of this weekend’s outrage, stock markets on Monday (16thNovember) recovered from early losses, however shares in companies such as easyJet, Thomson Holidays owner TUI and InterContinental Hotels lost ground as fears rose regarding the impact of the Isis attack on the tourism industry.
France has the highest number of tourists in the world, with 83 million visitors last year generating around €150 billion (£106 billion) in revenues — around 7% of its overall economy. According to reports, luxury goods stocks such as Kering, owner of brands including Gucci, also suffered, while airlines and travel stocks took the worst damage, with Channel Tunnel operator Eurotunnel sinking 50 cents to €11.82p, or 4%.
The Evening Standard reported that airlines were also hard hit, and easy Jet chief Carolyn McCall saw its shares down 22p to 1768p or 1.2%, Ryanair was off 23 cents to €14.13 and British Airways owner IAG slipped back 13.5p to 579p or 2%.
Once the initial human shock has subsided in the days following the second Paris terror outrage, thoughts will turn to security and prevention measures, risk management and then financial consequences.
Costs of death and damage caused by terrorism can be cripplingly expensive. Losses of life and infrastructure on Sept.11 cost upwards of $55 billion in New York alone, while increased security efforts, decreased economic activity and other costs amounted to more than $3.3 trillion, according to the Global Terrorism Index report from the Institute for Economics and Peace.
The episode demonstrates quite clearly that political risks reach far wider even than the terrorists could hope for by impacting business, causing disruption to everyday life as well as affecting the economy. Risk managers and insurers are taking note as they did in the wake of the Charlie Hebdo terror attack.
According to a paper in the weeks following Charlie Hebdo written by Dr. Gordon Woo, catastrophist and terrorism risk expert, RMS, Understanding the principles of terrorism risk modelling from the Charlie Hebdo attack in Paris:
“Lessons can be learn and even modelled, however. The practical choice of terrorist weaponry is explained by a cardinal principle of terrorism modus operandi: terrorists follow the path of least resistance. This military strategy originates from Sun Tzu’s The Art of War. This means avoiding targets that have very high levels of security, instead seeking out softer targets and attacking them with tested weapons. The optimal choice of terrorist weapon is one that uses technology with a successful track record.”
As Woo explains in the conclusion to his paper: “Governments are concerned about all manifestations of terrorism. Insurers have a much narrower focus on the subset of terrorist attacks that cause insured loss.”
Data sharing and greater analysis of political risks will also increasingly come into play when Underwriters assess their loss exposures and the potential impact on their Specialty class risks, whether they are in Property, Marine, Aviation or simply exposed to Business Interruption supply chain risks.