Without government help on extending the scope of terrorism risks insurers can offer only limited and expensive cover, or no cover at all. Lee Coppack reports
As their insurance programmes come up for renewal this year, UK businesses and organisations are having to decide whether to accept uninsured terrorism exposures or use the limited and expensive cover available through the international market.
Six months on from the US terrorist attack, governments have yet to find a way to fill the vacuum left when reinsurers excluded terrorism risks from treaty protection.
In the UK, the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) has publicly expressed its disappointment with the "slow progress" on increasing the scope of cover available through Pool Re, the government-backed reinsurance mutual. For risk managers, the cost of additional cover is particularly galling because rates for their standard property insurance programmes are soaring.
The British Property Federation (BPF) reports that commercial property landlords are starting to lose potential lettings because tenants refuse to accept the uninsured exposure. On some policies renewed since 1 January 2002, says the BPF, exclusions extend as wide as losses resulting from racial incidents to other forms of disturbance.
Suzanne Gill, director of property law for Klegal, explains that under commercial tenancy agreements, few tenants can require their landlords to take insurance cover against "extra risks", even though the tenant pays the cost of all insurances. If the cover is inadequate, the tenant has to make up the shortfall in about 70% of cases. "It makes no difference whether the tenant is a small, private company or a large, quoted plc," says Gill. "They could still have to foot the bill - which could have a disastrous effect on their businesses."
Thanks to government-sponsored Pool Re, property owners in mainland UK can buy normal limits of cover for damage or business interruption resulting from acts of terrorism at a cost which has not altered since 11 September. However, claims are restricted to losses resulting from fire or explosion.
"There are big areas of risk that are not covered," says Cargill insurance manager David Ketley, a past chairman of Airmic. "Inundation, impact, malicious damage and sabotage of public utilities could all result in losses, but none of them is fire or explosion."
Discussions have been taking place with the Treasury about increasing the range of cover provided by Pool Re. But this has not yet produced any variance from the original terms of cover. Airmic has told the government that it is not financially sound for any organisation to face unlimited liability as a result of a terrorist attack. "For all terrorist activity, the government must accept the role of insurer of last resort for losses above a significant level."
Malcolm Tarling of the Association of British Insurers (ABI), which is directly involved in the discussions, explains there are two areas under consideration: extension of the Pool Re property cover to include further perils, such as impact and contamination, and the addition of liability classes, such as third party motor and employers' liability.
The government, he says, is aware of the need to resolve the issue as quickly as possible, but certainly any extension of Poor Re's authority to cover liability risks would require a change in the law under which it was established, the Reinsurance (Acts of Terrorism) Act . This is more problematic. "If we are to see any change in the legislation, we will need to provide the government with evidence of very significant market failure," he says.
The market for terrorism cover for property risks is growing, though. In the past few weeks leading international insurers have established a joint company based in Luxembourg to insure property against terrorism. Zurich Financial services, XL Capital, Swiss Re, SCOR, Hannover Re and Allianz have formed Special Risk Insurance and Reinsurance Luxembourg with a total committed capital of E500m (£306m).
There are also insurers in Bermuda, at Lloyd's and in the London Companies and New York markets that are starting to write limited risks. And some reinsurance is available. Hannover Re, for instance, has continued to include terrorist risks in property treaties at increased rates and as separate cover. Munich Re is prepared to write terrorism cover on a stand-alone basis.
Demand for this cover has been increasing since hopes collapsed of an agreement with the Treasury before 1 April renewals, says Heath Lambert head of terrorism and sabotage insurance Steve Bessant. It is possible to place about £150m in cover for this difference in conditions, but it is expensive.
The cost is likely to be a multiple of the premium for the fire risk and Pool Re premium, says Bessant. "There is a dividing line between clients' and underwriters' perception of risk."
However, for UK-owned property elsewhere, the situation is more difficult. In most countries and all but a handful of US states, insurers are free to exclude terrorism risks entirely for commercial property risks, and then there is no alternative but this market.
Currently, about £350m of capacity worldwide is available from insurers, according to Willis e-trading executive director Tom Bartleet. He believes the market is responding to customers but admits that price is a big issue.
"There is notional capacity of £350m, but most are buying less than that. There is a difference between what is available and what is economically viable."
Among insurers, AIG confirms that it has written terrorism cover on several accounts in the UK for overseas property. The company offers cover for all types of property business worldwide with no exclusions by class and with few exceptions. A spokesman for the company says that acceptance was slow at first but picked up during March.
Lloyd's underwriter Beazley also reports an increasing number of inquiries turning into firm orders, as buyers and underwriters "have started to find satisfactory pricing, limits and deductible options", according to underwriter Ian Harrison.
He says any multinational operating in the US needs to examine its terrorism exposure. "We have bound business for many UK companies with a US exposure, including pharmaceuticals, mining, construction and real estate."
As lead underwriter, Beazley offers limits of up to $150m (£104m) stand-alone terrorism property cover through syndication in the London Market, principally Lloyd's. It states that rates vary depending on the risk profile, but for North American insureds, a rough guide is 0.1% on the total values exposed.
Another solution, says Bessant, is that organisations are routing terrorism risks through their captives and tapping into the reinsurance market.
According to Pool Re's chief executive Steve Atkins, captives are notable among the new applicants for membership of the pool, which is open to any insurer appropriately authorised to underwrite property business in the UK.
He does not specify the number, but Pool Re currently has about 220 members and the number is growing.
The distinction between the policy definitions of terrorism and strikes, riots and civil commotion is an important issue.
For Pool Re, the definition is set out in the Reinsurance (Acts of Terrorism) . Acts of terrorism mean "acts of persons acting on behalf of, or in connection with, any organisation which carries out activities directed toward the overthrowing or influencing, by force or violence," the government of the UK or virtually any other government.
Andrew Pincott, a partner in the law firm Elborne Mitchell who has acted for insurers in important war risk cases, says: "As a matter of law, the answer is going to turn on the words used in the contract.
"In general, the court may have to grapple with the concept of civil disorder with a political motive that involves violence and what distinguishes it from terrorism. One major element is likely to be the clandestine nature of the organisation of the event."
The fear of unlimited liability
In the UK, terrorism is still generally included in liability policies and it is legally required for the compulsory classes, such as third party motor and employer' liability.
AIG says it is prepared to cover third party liability exposures without a terrorism exclusion at standard limits on an individual account basis. "The exposure to potential loss is contemplated by the premium quoted."
Cover is available worldwide, although local market practice may result in a more extensive use of terrorism exclusion clauses.
For specialist classes, Beazley's Ian Harrison says full terror exclusion is in force for all policies except product recall. For product recall, there is a "buy-back" available for terror and malicious event directed specifically against the policyholder, such as a meat company whose products are contaminated by animal rights terrorists.
However, according to Malcolm Tarling at the ABI, there are issues relating to "the availability of adequate and affordable reinsurance for liability risks." Therefore, insurers have asked the government to consider authorising Pool Re to write liability reinsurance.
Even without the terrorism considerations, reinsurers are increasingly uncomfortable with unlimited third party motor, particularly following the Selby train crash in February 2001 which was caused by a car running on to a railway line and colliding with a passenger train.
Munich Re says neither insurers nor reinsurers has unlimited capital and so they cannot grant unlimited coverage. It says it is not possible to calculate adequate premiums for such exposure. A spokesman for the company said: "We do not think that exclusion of terrorism is necessary, but try to limit our liability." As an interim measure, where coverage is limited, Munich Re aims to introduce an annual aggregate and to reduce its participation in unlimited programmes.