France's two largest commercial insurers are holding the French government to ransom over the lack of terrorism reinsurance available.

AXA and AGF have threatened to cancel their major commercial policies if the French government does not act as an insurer of last resort through its Caisse Centrale des Reassurance (CCR).

The CCR is a 100% government-owned reinsurance company that offers limited cover of injuries caused by terrorism and some natural catastrophes.

This follows calls for Pool Re to extend cover beyond fire and explosion by the British Insurance Brokers' Association (Biba) and the Association of British Insurers (ABI), which were also concerned by lack of terrorism cover available from reinsurers.

It is compulsory for French insurers to provide terrorism cover with all property and casualty covers.

An AXA spokeswoman said it had cancelled 30% of its property business on an interim basis and obtained notices of termination on the remaining 70%.

"If we don't have any answer from the French government before the end of November, we'll be obliged to cancel the property policies because we won't have the reinsurance to back the policies," she said.

An AGF spokeswoman said the insurer had stopped writing industrial and aviation risks while it waited for the government to make an announcement on the reinsurance situation.

AXA Corporate Solutions executive vice president Patrick Cerceau said the insurers had to take drastic action to make the government aware of the looming problem.

Cerceau said he expected the rest of France's commercial insurers to follow their example.

Federation of European Risk Management Associations (Ferma) chairman Thierry van Santen agreed the government had underestimated the gravity of the problem, but he was confident a solution would be agreed.

He said Ferma's creation of a Europe-wide reinsurance pool would not be ready soon enough to fix the immediate problem. "The European Commission looks happy with the suggestion and some leading CEOs said it's the right solution but we need to change the law in many countries, including France and the UK," he said.

In France, Standard & Poor's analyst Yann Le Pallec said the insurers were in a delicate power play with the government.

"This is a question of negotiating power and it's difficult to know what the outcome will be," he said.