The Treasury is moving in the right direction on covering terror risks, but it needs to move quickly, argues Lord Hunt

A positive partnership between government, business, and insurance created Pool Re in 1993. The initiative followed the serious consequences of Irish terrorism. This excellent model for terrorism insurance gives the UK a definite advantage. Because the government stands behind Pool Re, the market place is able to function. There is, however, an urgent need to adapt Pool Re to meet new challenges. The terrorist has moved on in the last decade. Terrorism has become more sophisticated and more ruthless; and technology has moved on as well.

Insurance was thrust into the limelight by the appalling events of 11 September. In part, this was because it was the global insurance industry that met large parts of the gigantic financial costs. But the reverberations continue beyond this. Insurers have been forced to look again at the risks that we all now face from acts of terrorism. We have become much more aware of just how prevalent the terrorist is, how vulnerable we are and at what potential cost. The airline industry clearly felt this most immediately. The new government-backed arrangements may be temporary, but they have been absolutely vital in enabling air travel to continue.

Of course, the commercial market should provide as much cover as possible. In this case, however, the market will work only if it is supported by an effective method of reinsurance. For one thing, insurance companies need to be able to show their shareholders and the regulator that they have a responsible attitude to carrying risks on their own balance sheets.

Pool Re is the only show in town and how right the Association of British Insurers (ABI) is in suggesting its remit must be extended beyond the current "fire and explosion" to embrace impact, water damage, aircraft and contamination. Such a move will not require legislation. It is good to know that the Treasury seems sympathetic in principle. Chemical or biological attack is now an obvious terrorist tactic, capable of doing great harm to buildings as well as to people. Legislation would, however, be needed to include these liability classes within Pool Re. An open and honest dialogue about the pros and cons of changes here, in particular within employers' liability and public liability, is required.

So there are three vital ingredients to this positive partnership. The insurance market must be prepared to work together in the first place. Both government and business must recognise the value of partnership with insurers and insurers must recognise the value of that partnership. At the same time, industry and commerce must work more closely with insurers to manage their risks. Every business must have a real and workable disaster recovery plan.

Terrorism is not only an attack on the state. The terrorist wages war on us all. No one must be allowed to walk away from this problem, but we do need the government to respond quickly.

  • Lord Hunt of the Wirral is senior partner at national law firm Beachcroft Wansbroughs