Middle East escalation clauses under spotlight ahead of war, political violence and terrorism renewals

Middle East escalation clauses remain a key focus of renewal discussions in the war, political violence and terrorism market, with pricing in the sector expected to soften slightly at 1 January.

Abundant capacity and a limited number of substantial losses over the past year have led to a flattening of rates in the market.

Sources said that given the continued abundant capacity, it is expected that pricing will soften at the upcoming renewals.

However, Guy Carpenter said this downward pressure is being countered by the potential threat of social unrest or political upheaval in the wake of 2024’s high global election activity.

Swiss Re’s CUO for property Mohit Pande told this publication that many social, economic and geopolitical factors have contributed to the growing frequency and severity of claims from strikes, riots and civil commotion (SRCC).

One strategy reinsurers have adopted to mitigate this impact is to grow the terrorism element of their portfolio at the expense of the SRCC and war elements.

Guy Carpenter said the SRCC element of the portfolio is considered more volatile than the terrorism element.

Research by Howden earlier this year found that the SRCC reinsurance market is one catastrophic event away from dislocation, having recorded $15bn in insured losses since 2015.

One factor driving this potential dislocation is the lack of congruence in event definitions between the direct and reinsurance markets, particularly around hours clauses.

At present, treaty contract limits clauses have left reinsurers with a significant degree of horizontal net exposure. This has driven a greater desire for ground-up protections, with the increased demand for quota share products observed in 2024 renewals expected to continue.

Middle East escalation clauses

Reinsurance brokers are also looking to address the Middle East escalation clauses inserted by certain reinsurers – notably Swiss Re – into some specialty excess of loss treaties at 1 January 2024.

These wordings give the lead reinsurer the option of triggering the clause if, in their “reasonable opinion”, there is evidence of war, invasion, acts of foreign enemies or acts of hostilities between Israel and certain named territories.

Sources said these clauses have received much criticism over the scope afforded to the lead reinsurer in deciding when to trigger it.

And, given that broad scope and the fact the clauses have not been triggered, developments in the Middle East over the past six weeks have posed questions regarding their utility.

This choice not to trigger the clauses, considering the market accepts that current geopolitical circumstances would certainly have met the minimum standard required, is understood to be for two reasons.

Firstly, triggering the clause would likely result in the relevant reinsurers losing business at the upcoming renewals. And secondly, there has been a careful managing down of the overall insured exposure in the affected countries.

(Re)insurance market exposures in Lebanon specifically – considered more of a loss threat than Israel due to the latter’s Iron Dome defence system – are estimated at around $500mn.

As the clauses have not been triggered, questions remain over whether they should be inserted into 2025 specialty treaties at all.

Should the clauses persist, reinsurance brokers have said they will press for a tightening of the trigger wordings and a reduction in named countries to Iran, Lebanon, Yemen and Israel.