Spanish travellers - Wish you were here?

The UK government could do worse than look to Spain as it attempts to put in place a mechanism for compensating British victims of overseas terrorism, writes David Worsfold. The Spanish state-backed reinsurance model is often one of the first to react when dealing with natural and socio-political threats

The Victims of Overseas Terrorism Bill may have started off as little more than a well-meaning private bill in the House of Lords, promoted by Labour peer Lord Brennan, but it gained momentum during its debates before the summer recess. It was passed and sent to the House of Commons where it got as far as its first reading in June, before very quietly being edged out of the Parliamentary timetable.

The Bill may not be quite dead and buried but it now seems unlikely to progress further unless the government - which has expressed lukewarm interest while lauding its good intentions - gives it some precious debating time between now and the end of the session in early November. Having got it through the Lords once, the chances are very high that Lord Brennan will revive it later this year.

Protecting British interests

The main aim of the Bill is to put in place a mechanism for compensating British victims of terrorist attacks that take place overseas, and it has been strongly backed by the victims and families of incidents such as the Bali bombings in October 2002 and the shootings at Sharm el-Sheikh in 2005.

Lord Brennan has made it clear that he sees Pool Re as the most appropriate vehicle for delivering the estimated £3m in annual compensation that his Bill would require, as he explained in a Lords' debate: "Many will remember the IRA attacks in the City of London in the early 1990s. That led to the creation of a state-backed insurance system because the risk was thought to be enormous. That system, called Pool Re, now holds reserves of £1.66bn and, through a retrocession agreement, the government has been paid from that fund over £200m since it was established. I await with interest anyone who suggests that £3m is a figure that requires some special attention in the light of numbers such as that.

"This Bill seeks to create a mirror of (the agreement) which we thought was necessary to protect property as being the minimum we need to protect people," said Lord Brennan.

So far the government has been reticent about the idea of extending Pool Re's remit, and Pool Re itself also has reservations about dealing with personal injury and death claims. While this debate has been going on, others have started to look at the reinsurance company as a possible vehicle for delivering property insurance to homes and businesses built on high risk flood plains if - or maybe when - the commercial market starts to pull back.

The government's dilemma is that it has some genuine sympathy for British citizens caught up in terrorist acts outside the UK and has made donations of more than £1m to the Red Cross to help some of the people injured in recent years. It also does not want to make personal injury or life cover compulsory for people travelling abroad nor believe that there is a market failure, which requires it to step in. Market failure, government minister Lord Davies of Oldham told the Lords, was the reason why Pool Re was established in 1993.

There is, however, a model for a more broadly based state-backed reinsurer that takes on many of these risks in existence in Spain - the Consorcio de Compensacion de Seguros. It is a combination of a very broadly based Pool Re, a specialist agricultural insurer, and a guarantee fund along the lines of the UK's Motor Insurers' Bureau. It was established in 1941 in the wake of the Spanish civil war to deal with personal injury and property claims arising from the conflict and put on a permanent footing in 1954 when its remit was widened. It is state-owned but operates independently, having its own assets and not using any government subsidy.

The CCS has a remit to pick up a range of catastrophe claims from personal injury and property, including terrorism, and it can move quickly when needed as it has its own board made up of nine government-appointed representatives and another nine drawn from Spain's largest insurers. In the aftermath of 11 September 2001, for instance, while most other Western governments struggled to rush through emergency legislation, the CCS was able to put in place a scheme to deal with the sudden disappearance of passenger liability cover.

It collects a surcharge on commercial and private property, personal accident and life policies to cover a range of natural and socio-political perils that are compulsory in Spain (see box). From 2004 the commercial cover was extended to business interruption policies. Overall, 85% of the claims paid out by its catastrophe covers have been for flood damage.

The surcharge was reduced by half in 2007 to 4.25 per mille and the CCS expects it to go down by another 20% for 2008. This is despite some big payouts in recent years. The Madrid train attacks on 11 March 2003, which claimed 192 lives and resulted more than 1500 injuries, left the CCS with a EUR38m (£26.4m) bill and the bomb blast at Madrid airport on 30 December 2006 will end up costing around EUR30m, mainly for the 1000 cars that were crushed when the car park collapsed.

Property loss rules

Property losses from acts of terrorism are only covered in Spain but personal injury cover is extended to Spanish citizens while abroad with no deductible. The few people who travel abroad without insurance are compensated under a state scheme specifically for people injured by acts of terrorism, which reflects one of the principal objectives of Lord Brennan's Bill. He suggests using the Criminal Injuries Compensation Board as a fall back for those who are uninsured.

The CCS has equalization reserves of EUR3.7bn and is working with the Spanish government and the European Union to limit the impact of the Reinsurance Directive and Solvency II, as general manager Ignancio Machetti explains: "We cover the extraordinary or catastrophe risks that normal private insurance policies cannot support, so we have to be very aware of the exposures we have. We are looking at the impact of these requirements on our equalization reserves and have done a lot of modelling of the worst cases. We believe there is an objective way of calculating our exposures that will satisfy everybody."

As the Victims of Overseas Terrorism Bill is debated afresh during the coming months the spotlight will be turned on state-backed solutions and the Spanish model will no doubt feature, as will a similar but not as extensive French reinsurance scheme.

Natural perils

- Floods

- Earthquake

- Storms

- Volcanoes

- Meteorites

Socio-political perils

- Terrorism

- Riots

- Action of armed forces in peacetime

- Insurrection.

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