Andrew Holt and Sandy Maxwell report on the state of terrorism insurance a year on from 7/7
We are not afraid
A year on from the London terrorist bombings, has the likelihood of another attack increased or diminished? And how has the ongoing threat impacted on the insurance industry?
"I don't believe it has," says Martin Reith chief executive of Ascot Underwriting. "The industry has a short memory and threats alone make little difference - it will only react to a major loss event - and not in any prescribed manner."
The sad fact is that dealing with the threat of terrorism is becoming a way of life, this has indeed made little difference to the underwriting process. "From an underwriting perspective Ascot is assuming there will be a level of activity but do not assume where the loss will or might occur. Our simulations are based on aggregate exposure to any given area," adds Reith.
It is inevitable one of the major drivers behind terrorism insurance is the fear of the public and their perception of how safe they are about their day-to-day business. This was evident in both 7/7 and 9/11 where the economy took a while to re-establish itself. The numbers of passengers on public transport dropped and people were constantly informed to be vigilant and alert for suspects or strange behaviour.
Companies therefore look to a source of protection from lost earnings but also to protect themselves from any liability arising from a terrorist act where they have been deemed to be negligent towards the public or employees.
Adrian Lewers, political and contingency head underwriter at Beazley, says: "In the UK in particular, terrorism liability is a growing area as companies realise their responsibility to those outside the business circle. This surge in demand is reflected by brokers enquiring a lot more as to our ability to write stand alone UK terrorism outside of Pool Re."
Terrorism analysts, Exclusive Analysis, believe that the threat of terrorism is on the increase, predicting that there will be five attacks over the next 18 months in the UK.
"In Western Europe, the greatest threat continues to be to transport, rather than large public gatherings, unlike many other countries, where hospitality venues are popular targets," says Theo Butt, head of Terrorism Specialty Practice at Marsh.
Insurers and brokers in the London market distinguish between political risk insurance and terrorism cover. For example, Hiscox offers a separate policy insuring against terrorism, which complements its political risk and kidnap & ransom policies.
Marsh also offers standalone terrorism damage cover in addition to Pool Re, while Ascot offers completely separate standalone policies from Pool Re for specific building types. Ascot underwriter Julian Barker advises that its clients do not have to insure the whole of their schedule, unlike Pool Re.
Equally, Ascot's policies are flexible enough to subdivide areas that Pool Re treats equally, so that an industrial estate in Hackney is not treated in the same way as a City of London building.
Butt does not believe that the recent terrorism attacks in the UK have made any substantial differences to Pool Re tariffs. However, he adds that the bombings did end the trend towards rate reductions in terrorism insurance. A new entrant in the market, Lancashire Holdings, has increased capacity and there is a general "appetite for risk", according to Butt.
Torquil McLusky, business development manager at Ascot, says that, while there is a "squeeze on aggregate" in places such as central Manhattan and London, outside these areas there is more scope for standalone cover and capacity. Ascot is looking to spread its book into regional British cities, such as Manchester and Birmingham.
McLusky adds: "Every location is a potential target. Businesses might not be specifically targeted by terrorists but the impact can still be severe."
The message is clear: small regional businesses can no longer see themselves as immune from the effects of terrorism.
Barker says that buildings near the Tavistock Square bus bombing one year ago were only superficially damaged but access was denied for 14 days following the attack.
And you can't always rely on Pool Re to cover acts of terrorism. Not all the businesses and premises affected by the London bombings had separate terrorism cover.
This is corroborated by Exclusive Analysis.
It warns that regional cities are likely to bear the brunt of future attacks in the UK, while the focus will remain on creating the maximum number of casualties.
Although the 7/7 attacks in London have not had a major impact on premiums, Barker says that, in the wake of the bombings, Ascot is concentrating on analysing policy details such as denial of access, waiting periods, deductibles and attachment points.
Conversely, the World Trade Center attacks in 2001 changed the market substantially. Before 9/11, terrorist attacks tended to be covered by standard policies, such as property insurance. After 9/11, specific terrorism damage policies were created for many lines of business, according to Barker.
Stephen Ashwell, lead underwriter of war and terrorism at Hiscox, says that terrorism damage capacity has increased since 9/11, prices have eased and policy wording has become more "manuscript".
Also, more players have joined the standalone market since 9/11, according to Butt. Prices have fallen since then and capacity has increased.
Financial drivers are pushing up demand as lenders require more coverage. Ashwell says that banks often insist that clients have terrorism damage insurance. And banks themselves have also become major purchasers of terrorism coverage.
Although, according to the think-tank Demos, the threat of terrorism to UK businesses is not a huge threat - something British companies realise.
A Demos report - The Business of Resilience: corporate security for the 21st century - argues that the approach of UK companies following the July 2005 bombings compares favourably with the heavy-handed response of corporate America to the attacks of September 2001.
The survey of over 50 corporate security chiefs from FTSE 250 companies and their equivalents, 65% ranked terrorism as only the fifth most important security challenge facing their company, after crime, IT security, fraud and natural disasters.
"British business has avoided the hysteria that has gripped corporate America after 9/11," say the report's authors, Rachel Briggs and Charlie Edwards. "Public and political pressure has forced US companies to divert significant resources to responding to the threat of terrorism.
"UK-based companies have been far more measured in their approach. While terrorism continues to be a pressing concern for government, UK companies are focusing on more acute threats to their security, like fraud and IT security."
If this is a correct approach to take, only time will tell. IT