After Selby, reinsurers are reluctant to keep offering unlimited liability motor cover. Jason Woolfe reports on the market's fear that lightning may strike twice
Reinsurers are nervous. Since 11 September their priority has been rebuilding their balance sheets. As limited companies, why should they give unlimited cover to their customers? The last thing they need now is another catastrophic disaster with uncapped costs.
But motor insurers in the UK are desperate for them to keep selling unlimited reinsurance. The Road Traffic Act requires that UK motorists are covered for unlimited liabilities and this is part of all motor policies.
So, if reinsurers withdraw or restrict cover, UK insurers will be left exposed to potentially vast losses, - unless they can persuade the government to rewrite the law.
One reinsurance broking source with extensive knowledge of the market doubts that insurers will be able to buy reinsurance cover on an unlimited basis for much longer.
"I would be surprised if they were offered it after 1 January 2004," he says.
He also considers insurers politically naïve if they expect parliament to change the Road Traffic Act in a hurry.
Going on past form, the government will be reluctant to step in unless the market fails and there's a knock-on problem for motorists.
Deaf ears at Whitehall
The Blair administration's intervention in the aviation insurance market last year is a case in point. It provided only backstop support for the aviation industry when the world's airline fleets were within hours of being grounded due to a lack of cover.
In addition to this, he believes reinsurers struggle to make their voices heard where it counts - in Whitehall.
"The only people who can lobby the government effectively are in the ABI," he says.
"It would be true to say that while this motor problem has been raised with the government, it hasn't been top priority with insurers.
"Terrorism is the number one priority.
"Motor has been mentioned by the insurance market, rather than made a formal request."
In Monte Carlo next month at the annual Rendez-Vous meeting to negotiate reinsurance renewals, unlimited motor liability is certain to come up.
And as reinsurers turn up the heat, the primary market will be forced to lobby for a change in the law or find other ways of covering liabilities - or both.
The prospect of an EU move to harmonise motor insurance laws and scrap the UK's unlimited liability is thought to be an eventual likelihood but that could take years.
The reinsurers' agenda is much shorter. Swiss Re UK head of underwriting Trevor Marley said: "It's long been an article of group corporate governance at Swiss Re not to support any new unlimited contracts in a number of territories and to work towards the removal of unlimited liability worldwide.
"As a limited liability company, why or how can we be in a better position to offer unlimited than any other company?"
The reinsurer's argument is strengthened by the current turmoil on stock markets. More than ever before shareholders need certainty. Marley says: "The group's thinking is that in the medium- to long-term we have to work towards totally removing unlimited liability.
"We need to talk to our clients and establish a strategy towards the legislation. We are talking about legislative changes which, I think it's fair to say, the UK government is reluctant to undertake."
In the short-term, Marley said he "envisaged" renewing unlimited treaties on 1 January.
Other reinsurers may not be so generous. One reason is that they are already facing similar reductions from the providers of their own cover, the retrocessionaires.
One reinsurance broking source says: "The retrocession has largely collapsed. It just isn't there."
This is not a problem for Swiss Re UK, which relies on its parent company's strength rather than buying retro cover on the open market. Marley says: "The retro market is certainly much harder now."
Marley says that although the terrorism debate has focused minds on the unlimited cover question, the problem has its roots in escalating court awards.
The Selby rail tragedy, in which a Land Rover careered off the M62 and on to the East Coast mainline on 28 February last year, demonstrated how one accident could cause immense damage.
Ten people died when Gary Hart's car was hit by a speeding express train, which then collided with a freight train carrying 1,600 tonnes of coal.
A claim for £11m was lodged against Hart, who was jailed for five years for causing death by dangerous driving. The total cost to insurers is expected to spiral to more than £50m.
For Marley, what matters is the trend towards ever-higher court awards in liability cases.
"It's wider than just terrorism," he says.
"One of the fundamentals of reinsurance is being able to assess frequency and severity of losses and it's becoming harder, particularly in relation to severity."
Escalating bodily injury awards mean the likelihood of an extremely large claim is growing all the time.
Marley draws an example in which the cream of the Manchester United football team is involved in a serious coach accident. Such a claim could soar way above £25m - the typical deductible set by Swiss Re for unlimited cover provided to primary insurers.
The primary insurers say they can find new ways of protecting themselves from unlimited liabilities.
At least one managing director believes he can secure his business simply by buying many levels of reinsurance cover up to such a high ceiling that it would protect his company against all but the smallest amount of the most serious catastrophe.
And because the less likely the risk, the less he pays for his reinsurance, the top slices of cover should be relatively cheap.
Norwich Union director of commercial underwriting John Seaton accuses reinsurers of failing to speak with one voice on the subject.
He argues that, as long as primary insurers can buy reinsurance up to very high levels, the problem will not be too acute, although they would face exposures in the event of a severe catastrophe.
"Some of them have said they want to see if we can influence the government and some of them are more overt in changing the basis of their cover," he says.
"If we could buy very high levels of cover it might not be too different, but it would leave us exposed at the top end."
His favoured way forward would include a government review of the Road Traffic Act, with an open discussion with reinsurers about levels of cover and pricing.
Seaton expects that motor liability cover will ultimately be capped, but acknowledges it may take a long time.
By that time, it is possible that the factors producing today's flurry of worry over the subject will have changed.
Direct Line motor business manager Stephen Treloar attributes the current debate more to fallout from the 11 September attacks than the Selby tragedy.
This implies the unlimited motor liability issue could stay on the agenda as long as international terrorism is at the forefront of everybody's minds.
With the prospect of the UK supporting a US-led attack against Iraq, the urgency is likely only to intensify.
Treloar says: "The magnitude of the risks demonstrated by the World Trade Centre and Selby are far apart.
"Selby didn't trigger any changes in the way reinsurers consider their liabilities."
He says 11 September forced the industry to reconsider its assumptions about risk.
Risks that were previously regarded as one-in-1,000 year freaks are now regarded as able to occur every decade or so.
Treloar argues that despite this largely psychological change, the reinsurance arena remains driven by market forces and that even in a hard market, there may be some reinsurers prepared to offer unlimited cover if the price is right.
Direct Line will be talking to its reinsurers later in the year, but will certainly not be keen to lose coverage.
But in addition to achieving reinsurance for its unlimited liability policies, Direct Line and other primary insurers will have a list of other requirements.
Treloar says: "It will be one of a number of issues we need to talk to the reinsurers about, along with pricing and coverage and also the ratings and capital adequacy."
The fact remains that it's getting increasingly likely that primary insurers will have to carry more risks, even if they are at the very top end of a spectrum otherwise protected by reinsurance.
And what will that cost? Treloar argues that's an impossible question to answer. The true cost will only be known when the worst happens.