Reinsurers have plenty of capacity to provide cover for terrorism but the market has tightened due to natural catastrophe losses, according to a report by Guy Carpenter.

It says terrorism incidents remain at historically high levels but the reinsurance industry and government insurance pools continue to provide adequate cover.

Noting that next month will mark 10 years since the September 11 attacks in the US, the report says the terrorism reinsurance market has undergone significant change since peaking in 2002-04.

“The absence of major terror losses in subsequent years saw capacity increase, creating supply and demand imbalances and prompting a general decline in global terrorism-specific reinsurance pricing.”

It says pricing has flattened recently after years of downward movement because catastrophe losses have reduced reinsurers’ capital.

“Both the property catastrophe and terrorism markets are characterised by low-frequency, high-severity exposures. Since reinsurers pay all types of low-frequency, high-severity catastrophic claims from the same pool of available capital, the recent natural catastrophe losses and industry capital decrease have eased the downward pressure on terrorism pricing.”

Guy Carpenter estimates the US market has between $US6-8 billion ($5.7-$7.6 billion) of capacity available. Some of that is unclaimed, as much of the US terror risk resides in the Terrorism Risk Insurance Act program, which does not purchase reinsurance. 

The report says major terror pools globally consume $US9 billion ($8.6 billion) of capacity. 

The oversupply of capacity is expected to “stifle” premium increases, and reinsurers expect that their overall appetite and available capacity for terrorism will be steady in 2012.