State of alert

With many on guard over the possibility of future terrorist attacks in the UK, Fiona Denton highlights the importance of terrorism cover and looks into the entities that insure this risk

Two weeks before Christmas, Home Secretary John Reid announced that the risk of a terrorist attack remains "very high", with evidence to suggest that there may be up to 30 major terrorist plots in the planning. The struggle against Muslim terrorism will, he said, "last at least 30 years".

Such a declaration again throws the spotlight on terrorism insurance arrangements for companies in the UK and across the globe. In the UK, there are two sources of insurance for terrorism risk - Pool Re and the private market, with the latter made up of companies that are not members of the pool and focused largely in Lloyd's.

Pool Re was established by the UK insurance market with government support in 1993. Its creation followed restrictions in the scope of terrorism cover, which were imposed by the international reinsurance market following a spate of IRA terrorist incidents in London and elsewhere in England. It provides insurance for commercial property as well as business interruption and related classes, including residential property in commercial ownership. Pool Re has substantial reserves, and HM Treasury acts as the reinsurer of last resort.

Members of the pool insure the risk - UK only - and can then recover from the pool if their payments for a particular terrorist incident exceed a certain amount. The level depends on the amount of cover they transact with the pool. Some of the most significant incidents that have resulted in claims on the pool include the attacks on Bishopsgate, London, in April 1993, which cost £262m; London Docklands in February 1996, which cost £107m; Manchester city centre in June 1996, which cost £234m; and Ealing, West London in August 2001, which cost £7m. The London underground bombings in July 2005 are expected to be well below the majority of these claims levels, and are predicted not to exceed £40m.

Worldwide change

Following the attacks on the World Trade Center and other locations in the US on 11 September 2001, substantial changes took place in the world reinsurance market with regard to coverage for terrorism. Reinsurers decided they would no longer provide the balance of terrorism cover, and they applied exclusions in respect of damage caused by perils other than fire and explosion.

Reinsurers also added a wider definition of what constitutes an act of terrorism to their exclusions. This decision resulted in the expansion of the private market outside of the UK for terrorism cover, with Lloyd's at its centre and now accounting for more than 50% of the worldwide capacity of $1.6bn (£819.6m).

Despite the dominant position of Lloyd's, only a handful of its underwriters operating outside Pool Re can offer stand-alone terrorism insurance on a global basis - these include Ascot, QBE, Talbot and Catlin.

Julian Barker, a terrorism underwriter at Ascot, comments: "The terrorism insurance market has grown by about 25% a year since 9/11, as the coverage has become a more required stand-alone product. Buying targeted terrorism insurance policies is no longer about good corporate governance, it's about essential contingency planning."

Policyholders who decide to effect terrorism cover through Pool Re must include all of their premises without selecting the most vulnerable. Companies that only want terrorism insurance for trophy buildings or sites in high-risk centres, such as the City of London or Canary Wharf, tend to access the private market for this purpose.

Some high-risk centres around the world - for example, the EC3 postcodes in London and Canary Wharf, plus the postcode 1000 in Brussels - have limited availability due to the number of insureds requiring coverage and the exposure to potential attack. Therefore, premiums offered for these areas, from both Pool Re and the stand-alone market, are at the top end of the scale.

At present, underwriters have low terrorism loss ratios, typically 5%, but the global nature of the risk emphasises the random nature of the threat. Other geographical areas that have featured highly on claims statistics include Colombia, Peru, Jordan and Indonesia.

Global networks

While events such as the World Trade Center attacks of 2001 and the Madrid bombings of 2004 have demonstrated the power of terrorists to wreak destruction, the global nature of their networks makes it difficult to predict the location of future attacks or whether the frequency will increase.

Mr Barker adds: "Threats vary considerably from country to country, with different organisations choosing different targets and a variety of methods through which to attack those targets. It's difficult to identify the exact nature of the most common claims, as no two terrorism incidents are ever the same."

Cover for chemical, nuclear, biological or radiological attack is provided by Pool Re but excluded by the majority of the stand-alone market. The reason for this reluctance is the nature, scale and uncertainty of the damage and losses from CNBR events.

There have been several serious CNBR attacks in the past, including the release of sarin gas in the Tokyo subway system in 1995, which killed 12 people and injured nearly 6000, and the anthrax attacks in the US in 2001, which infected 22 people when anthrax spores were distributed via the postal service to media organisations and political offices.

One of the principal differences between Pool Re and the stand-alone market lies in the definitions the two use for an act of terrorism and the policy exclusions they include. Pool Re will pay only claims for damage to property or business interruption caused by an event that aims to overturn or influence government. The stand-alone market has a different definition of an insurable event, in that it covers claims caused by groups wishing to bring about religious, ideological and social change - something that represents much wider cover.

Mr Reid's pre-Christmas message will have put UK PLC on its guard but, whatever the outcome, the insurance industry is well placed to respond to the heightened threat.

- Fiona Denton is an executive director at Lockton Companies International.

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