Terrorism is unpredictable but the repercussions after an attack are widespread. Jeremy Golden says businesses must be prepared for the unthinkable
The series of explosions in Madrid's railway stations in March 2004, which left 191 people dead and many seriously injured, was a devastating reminder of just how exposed a major European city can be to a terrorist outrage and how impossible it is to predict when such an event will occur.
All too often, government and anti-terrorist sources in this country have expressed ominous but non-specific warnings. Most recently, this happened late last year when the Metropolitan Police Commissioner Sir John Stevens stated terrorism was a major issue for the UK capital, adding that: "The risk of an attack to London has not changed; an attack is still inevitable."
According to Mr Stevens, at that time a number of terror attacks had been thwarted and hundreds of people were going through the courts. The assumption is that a similar bombing campaign to Madrid or even worse may have been planned.
If such an attack or attacks in UK cities are now perceived as "inevitable" how has this affected demand for terrorism cover and to what extent are there sufficient insurance resources available in response?
Peter Adlington, Allianz Cornhill's property and commercial reinsurance manager says: "In the post-11-September era, despite the widely held perception that there is likely to be a major terrorist incident in this country, we are not seeing vast new demand for terrorism cover. Personally, we are seeing demand as we write more property owners' business, this being driven by investors such as pension funds and banks, both as direct investors in property and as providers of capital.
"The market still tends to assess risk in terms of a car bomb or conventional attack, disregarding a terrorist attack using a dirty bomb and also a nuclear, biological or chemical attack."
Accordingly, he explains, there is a reluctance to buy terrorism cover unless companies feel part of their business is geographically exposed in a major city centre.
"Many companies still don't appreciate the full business impact in the event that there is a major terrorist catastrophe. If there were a chemical attack in London, the wind could carry the toxic fumes for miles and a vast metropolitan area would be paralysed for a significant period of time. The perception is that if such an attack took place, business operations would simply be transferred to another city with little thought of how this would be achieved," Mr Adlington explains.
Where commercial property is damaged as a result of an act of terrorism, a standard commercial property insurance policy will generally provide limited cover (usually confined to £100,000 per head of cover) - full cover is usually excluded.
On payment of an additional premium, however, the insured can extend the standard cover for terrorism beyond £100,000. As this additional cover is an extension of the standard cover, the terms of the insurance policy will continue to apply to it, and the contract for the additional cover remains between the insured and the insurance company. Any claim is made by the insured and any payment made on a claim is made by the insurance company.
Behind the scenes, this additional terrorism cover is dealt with under what is usually referred to as the government-backed Pool Re scheme. Pool Re functions as a reinsurance company and all the main UK property insurers, including Allianz, Royal and Sun Alliance and several Lloyd's underwriters, are members. It has also been given exemption from the Competition Act by the Office of Fair Trading and has individual treaties with members.
Pool Re and insurers cannot refuse terrorism cover if requested by a client who otherwise complies with the requirements laid down by the Treasury.
One of these requirements is that customers cannot select to insure only those properties they feel to be most at risk - it is all or nothing.
The Pool Re scheme does not cover domestic property owned by an individual but does cover flats and houses owned by companies.
Excess of loss
In 2003, Pool Re provided cover to the market (member companies) on an excess-of-loss basis, giving protection in respect of specific events and an aggregate cover in respect of all terrorism losses incurred in one year. The 2003 retention for a single market event was £30m and the aggregate cover £60m. These levels have risen to £75m and £150m in the current year and are planned to increase again to the targeted levels of £100m and £200m by 2006.
Cover has also been widened to an all-risks basis, including so called NBC - nuclear, biological and chemical cover.
Individual member companies each retain a share of the above limits, calculated by reference to their share of the total premiums paid to Pool Re by members.
The Treasury has a role in certifying whether a particular incident falls within the definition of "an act of terrorism" and, therefore, whether it is covered by the Pool Re arrangements. Following consultation with the insurance and commercial property industries, in December 2004 the Treasury published a set of general principles of interpretation as a guide to the application of the definition. The principles do not change the scope of the cover provided through the Pool Re arrangements but clarify the existing situation (see box).
Mr Adlington says: "The Treasury has made known how it feels in the event of an incident but the fact remains that a potential scenario may arise in which it would have to be proven in the court of law that a terrorist act had been committed in order for the Treasury to authorise Pool Re to make payouts to underwriters."
He explains that under the Pool Re arrangement, terrorism cover is similar to other categories of non-life insurance or business interruption and follows normal insurance law. "However, there are theoretical gaps, which so far have not been tested, between the words of the Pool Re cover, Pool Re cover as defined by the Treasury and the extent of exclusions used in non-Pool-Re reinsurance contracts. This can leave even the client who does buy cover exposed."
For example, Pool Re does not cover liability and it is standard for insurers to impose sub-limits for terrorism where they are able. According to Mr Adlington, Allianz provides a more comprehensive coverage to ensure that any such gaps are addressed.
Timothy Press, director of special risks at independent insurance and reinsurance broker Miller, adds that there is also a need to arrange protection on a stand-alone basis - a service Miller specialises in.
"If you have a large commercial property portfolio, it makes sense to subscribe to Pool Re. However, on stand-alone risks the Lloyd's market is innovative. Stand-alone commercial policies are insured with Lloyd's, Bermuda and other international markets, depending on levels of demand and capacity required," he says.
In October last year, with the support from various underwriters, Miller obtained agreement from Lloyd's to revise the standard Lloyd's definition of terrorism to encompass state-sponsored terrorism (secret agents) in order to provide clarity of coverage and not leave any grey areas. Mr Press states that US clients who wanted to be covered primarily drove the demand for the revised definition, which can apply to state-sponsored terrorism in the UK.
Aon claims to be the first to offer an integrated counter-terrorism insurance and risk management solution, including the placing of terrorist insurance for multinational clients on a global basis.
According to Paul Bassett, executive director, counter terrorism and political risk, Aon may review exposure to terrorism and conduct a business impact study if required, such as analysing the implications for a company if a bomb explodes outside a building. However, Mr Bassett adds that some clients simply ask for a quote straightaway and are only interested in insurance, not risk management.
As for the UK specifically, he says: "We are finding that demand for terrorist cover is strong among pharmaceutical companies - as a target for animal rights extremists - and also among power utilities, transport infrastructure and local government authorities."
Mr Bassett confirms that the UK market is experiencing an increasing demand for liability cover as a result of terrorist attacks, including third-party and employers' liability.
As in the US after 11 September - where United, American Airlines and airline security companies are facing nearly 100 individual and class-action lawsuits for allowing passengers to board - UK businesses may also be exposed if, for example, there is no plan of evacuation in the case of a terrorist attack inside a building. Aon can make an assessment of counter-terrorism measures and look to reduce such liability premiums.
As demonstrated by the bombing of Manchester city centre in 1996, the retail sector has significant exposure to terrorism. Capita is among the largest loss adjusters in the UK and has a specialist terrorist experience going back to Bishopsgate. In the assessment of Phil Heron, director of technical adjusting services, nearly all of Capita's major retailer clients now take out terrorism insurance.
"Our liaison is with claims departments from composite property insurers, including Lloyd's. Ongoing dialogue with Pool Re is important, as the market needs a commonality of approach between all service providers," he says. "A terrorist incident naturally generates a considerable amount of emotion and this is where our experience at Bishopsgate and Manchester can prove to be invaluable. A huge incident happening at once requires a major loss adjusting team and Capita has an 'army of emergency professionals' throughout the UK that can centralise operations in one location at short notice in order to assess building damage, for example."
Mr Heron states that the market is alive to the gaps in cover and stresses that they are gradually being narrowed. "Brokers are liaising with underwriters and gaps have closed significantly in the past 18 months, reinforced by the recent clarity to the definition of terrorism provided by the Treasury in December. For example, there is a more consistent approach to the interpretation of business interruption, including denial of access, in which the building did not sustain damage but people are prevented from using the store."
And William Farmer, director of counter-terrorism and political risks at Aon, points out that the Pool Re scheme is still widely considered to be the most effective scheme of its type worldwide. "Pool Re is reasonably priced, it has paid out significant losses in the past and a surplus pool is available. The Pool Re wording is considered 'safe' yet hasn't been proven. It hasn't been tested as, thankfully, no major terrorist event has occurred that potentially falls outside the Pool Re definition.
"As for risk management, it is mainly a reactive business and, therefore, companies are more likely to take precautions after an attack, which is understandable."
TREASURY PRINCIPLES APPLIED TO DEFINITION OF ACTS OF TERRORISM
General principles provided by the Treasury in applying the definition of "acts of terrorism" in section 2(2) of the Resinsurance (Acts of Terrorism) Act 1993 in the context of the Pool Re scheme. The principles cannot be taken as a definitive legal interpretation, nor are they offered as legal advice to parties that might be affected by the scheme.
The essence of the definition is the relationship between the act in question and an "organisation".
The scope of the term "organisation" is not expressly limited and includes "any association or combination of persons". Diffuse, decentralised structures would not be excluded.
It is clear that there would need to be a significant element of continuity before an "organisation" could be said to exist. Persons acting spontaneously in concert (without more) would be unlikely to constitute an "organisation", although their actions might still be carried out "on behalf of" or "in connection with" an organisation.
"Overthrowing or influencing a government by force or violence"
The organisation must be one that carries out activities directed towards overthrowing or influencing a government by force or violence. An organisation whose activities were limited to funding or otherwise supporting the forceful or violent acts of others would not be excluded.
The precise motive or subject on which influence is sought to be brought to bear makes no difference: it could be political, ethnic, religious, cultural, or anything else.
The "force or violence" envisaged does not have to be carried out by the organisation itself, nor does it need to be successful in its aims.
The fact that the organisation's activities are directed towards the end of exerting influence over a government by force or violence would be sufficient.
The fact that an organisation's activities are not aimed at specific government targets would not be decisive: the organisation might seek to influence a government by attacking private property, and would not fall outside the definition for this reason.
Acts "on behalf of" or "in connection with" an organisation
The act in question needs to be related to the organisation. However, the act would not need to be carried out by a member of, or person authorised by, the organisation. The fact that it was carried out by a sympathiser, or "cell" acting independently of the organisation's hierarchy would not exclude it from the definition.
Published 13 December 2004. Source: HMS Treasury.
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