Elliot Lane questions a panel of risk experts on how current security threats to the UK and worldwide will impact upon the industry
Chair - Elliot Lane, editor, Insurance Times (2)
David Gamble - executive director, Airmic (5)
John Eltham - business unit leader for special risks, Miller Insurance (1)
David Grant, risk solutions underwriting director, Royal & SunAlliance (8)
Alan Gairns, property development manager, Royal & SunAlliance (6)
Mike Sims, head of Asia desk, Exclusive Analysis (3)
John Haggar, senior property broker, Marsh UK (7)
Richard Higgs, personal accident underwriting manager, SLE (4)
Chair: David Gamble, as Airmic executive director what is the position on terrorism at the moment for your members and what do you see as some of the major issues and threats?
David Gamble: We are now five weeks on from the 7 July London bombings. The big companies will take on board that there was not the sort of disruption that might have been expected, and of course the attacks weren't successful in terms of bringing London to a halt - certainly not as successful as Katrina has obviously been in the US.
I know of one company based on Tavistock Square that was affected for several days, but its business continuity plan kicked in very successfully and it was able to manage its business.
The Transport for London staff who manned the trains and the people at the stations obviously hadn't been trained, but they rose to the occasion incredibly well.
Chair: Alan Gairns, from your perspective, it is remarkable that many of the large carnivals and summer concerts are still going on. Have you had to talk to your clients about assessing the risks and make major changes to the underwriting?
Alan Gairns: David touched on a key issue - business continuity. What 7 July showed was that there wasn't a lot of damage, but there was potentially a lot of disruption, and it's making sure that you have the proper plans in place.
I know we've looked at getting messages out in terms of risk assessment guides to help, and business should be carried out in terms of proper risk assessment, such as 'how do I run this building?' and 'who else do I depend on to be able to run my business?'
It's one of those issues that people probably put off. They think 'well I've got insurance, everything's fine', but you do need to spend that time going through proper risk assessment, because that will be the key going forward in terms of making sure that a business can continue to run or, if it's stopped for a couple of days, it gets back on its feet as quickly as possible.
Chair: Mike Sims, from a risk perspective, what do you see as the big threats?
Mike Sims: If I can take the focus slightly away from the UK, because ultimately I look at Asia rather than the UK. I suppose for us really all the focus is on Sunni extremism, and groups that are branded al-Qaeda or looking to brand themselves as al-Qaeda at the moment. For us, al-Qaeda reflects pre-9/11 capability that really isn't in existence today. That network was absolutely smashed in Afghanistan.
What you do have is a lot of what we term green shoots movements - young angry radical Muslims who are looking to inflict damage, particularly on western nations .
The focus in terrorism terms shouldn't just be on Sunni extremists - there are plenty of insurgencies going on around the world which fall under the umbrella of terrorism and create liabilities for underwriters. In the Philippines you have the New People's Army and in Colombia obviously you have FARC. In Nepal there are the Maoists fighting the government and plaguing much of India and down the eastern coast. There are plenty of other areas that have nothing to do at all with extremism and are perhaps a threat to lives in the UK.
Chair: John Haggar, from a broker's perspective?
John Haggar: In terms of where the threats are, in terms of inception, if you like, in London and with Madrid and other events around the world, it seems to be capital cities where the events take place. Clearly within those cities, transportation networks and other public places are the major targets.
From a business point of view the knock-on effect for the retail sector and tourist attractions will be concerns about loss of attraction, particularly London. If we were to see a sequence of events, that would be a concern to businesses, with customers not coming back through fear. Businesses can handle damage -there is a solution for direct business interruption, but there is not an adequate solution for longer term contingent business interruption, and that's therefore something on which businesses have to focus their contingency plans at the moment. There is not an obvious easy way out as far as insurance is concerned.
John Eltham: A contingency plan is essential.
I agree with David's point that the UK has suffered from terrorism previously, so there's possibly more experience of the resilience that's been shown, which has developed over the years.
Following 9/11, firms such as Exclusive Analysis have come much more to the fore and there is much more of an awareness among risk managers of the services that can be offered. Risk managers, particularly those in the public quoted sector, where there is shareholder pressure, must be seen to act diligently. So from a contingency planning standpoint, that's certainly worked its way through the system.
Chair: David Grant, from a multinational perspective, are the publicly-quoted companies far more aware?
David Grant: Some of them are. What we see particularly from some of the overseas companies, perhaps those which don't consider themselves in countries where there is a threat, is they don't use business continuity plans. It is those companies that will possibly be caught short.
Chair: Do we feel that 9/11 was a catalyst and that things changed from that point?
Grant: Well they certainly did in the whole industry, in that 9/11 has forced reinsurers into taking the view that they should rewrite their policy wordings.
Unfortunately, the pace at which different markets have dealt with the problem and the limited reinsurance capacity has been difficult. So from an insured point of view it's actually a minefield to know what the cost is going to be, or whether you get any cover at all. It's not always so easy as it is in perhaps the UK, where Pool Re exists, as in some other countries where there isn't a specific facility.
Richard Higgs: From our perspective, being involved in the sport and leisure sectors, homing in on the Olympics is a good example of where it's great to see Transport for London already using consultants that have learnt lessons from Madrid, from Atlanta, from Athens, in how to keep the transport network safe, or as safe as it can be, against terrorists.
In the UK, unfortunately, we are used to terrorism, but they were terrorist groups that probably didn't want to kill innocent civilians, so they would not necessarily target major sporting events like the Ashes. However, the latest factions really don't care, meaning the events have to be arranged much more carefully with lots of precautions encouraged beforehand. It is not necessarily the insurer's solution, it's the management of the risk and the management of the event, and after the event has happened, how we cope with it.
Haggar: The understanding of the objectives of terrorists changes things dramatically. We've heard the economic, we've heard of mass attack and just to try to disrupt sports, leisure, normal society. The capital's major buildings are seen as prime targets, but then again, picking up on a point over here, it's the consequence of being located close to an embassy, or the Bank of England that needs to be thought through. There is a lot more sharing of information. I don't know, David, whether you find that your members actually do share information?
Gamble: Very much so. And as I mentioned to Elliot before we sat down, I noticed that the Financial Times has been raising awareness on Asian bird flu recently. It's a subject that it keeps returning to in editorials. If it leads to the same panic we had with SARS, then all the lessons learnt in business continuity become extremely relevant, reiterating the point you make about other countries that don't think it's important to have a business continuity plan, because they don't ever see themselves as being a target of terrorism.
In Canada people are a lot less disciplined than they were in Vietnam when it came to an outbreak of SARS . You run into cultural differences from one country to another as to whether or not you can contain your population. So if it does happen it will be a major test of resilience. Let's hope it doesn't.
Chair: Do we feel then that non-metropolitan areas might become targets? That targets have changed from structural damage to causing civilian casualties and civil disruption?
Sims: It's difficult to envisage threats outside the main metropolitan areas simply because of what we've seen. In this country the take-up rates for Pool Re cover outside the major cities are pretty low, and it would need actual events to take place outside London to convince people that there is an exposure there.
Grant: That's certainly the view of most of our clients - they really don't feel they're exposed to terrorism.
Haggar: We offer three degrees of terrorism: either no terrorism, threat of terrorism, or actual act of terrorism, and again outside the major cities businesses tend not to want to pay the extra, because they can't see that there's a problem. Then if transport is disrupted because there is a problem, they're crying because they don't have the cover.
Chair: Do we think there is enough capacity at the moment in the UK market, or is Bermuda the new home for terrorism cover?
Haggar: In the UK clients still have the option of Pool Re cover. It's my understanding that '
' Pool Re has trust funds of about £1.9bn, and obviously the government are reinsurers of last resort, so there's no issue there in terms of capacity. There is an alternative market available through Lloyd's that has capacity - something like €1bn, and that's not just the UK. The UK capacity is actually less than that, because obviously a number of the Lloyd's players are Pool Re members, so it's something like £150m. So capacity's not an issue.
There are other issues with the choices that Pool Re presents clients, because it's an all-or-nothing rule, and that indeed is probably one of the reasons why a number of companies outside the metropolitan areas choose not to buy cover, because they can't.
Without getting too technical, the way that premiums are rated by Pool Re in the sense of business interruption, businesses will pay the same premium as somebody in a metropolitan area because of the way that insurers have adopted the Pool Re's rating structure, even though they didn't need to, and there's a certain amount of flexibility there. But in terms of capacity, no, there's not really an issue with capacity in the UK.
Gairns: The question is what is terrorism? And while it's always easy to look at what we know and what we understand, it's perhaps a bit harder to think forward to other events that may come along. I suppose at the moment you would say that large gatherings of people, be it transport or sport events, are under attack. But it does seem that with the development of the internet, small groups can join together until they become a larger group much more easily than in the past, and you get something like the G8 summit, where people come from all over the world to cause disruption. You've also got animal rights.
Chair: Animal rights activism, that's a very regional problem. Are these activists sophisticated enough to administer cyber-terrorism?
Sims: It's not an area we get particularly involved in, but there's certainly a massive amount of evidence that there's a lot of communication and coordination between groups focused on Iraq and elsewhere. And with very extensive use of the internet and technology more generally, we need to understand and coordinate what they're doing. If
I just think about locations within a country, then I think of last month in Bangladesh where 469 bombs went off in the space of an hour in 63 or 64 districts.
Grant: In the US certain companies have incurred more insured damage every year through the smaller animal rights activist-type events than through the larger events.
Eltham: The big one out there is a movement called ELF, the Earth Liberation Front. It has carried out a number of arson attacks and some bombings, which have had commercial consequences.
Chair: Is that specifically targeting energy and oil companies?
Eltham: No, it's been fairly random, just to get publicity.
Chair: Is there anything we can learn from what you've seen abroad? Do any of the international providers have different methods that the UK can learn from?
Grant: Other countries look at Pool Re as a possible way of doing things, but the results are varied. Many of the outcomes are influenced by legislation so, for example, in France legislation existed where it was impossible to exclude terrorism, therefore a facility had to be set up to provide income for all.
In Australia another form of pool was set up for everyone, just by a very simplistic method of charging a percentage of the employers' premium. So those, if you like, are the simplest forms and they have worked very well, whereas others have not been so simple and quite complex, the US Tria [Terrorism Risk Insurance Act] scheme being one. It hasn't really performed in the way it should have.
I don't think any of the methods are perfect. Some are easier to operate from an insurer point of view, as well as an insured point of view, and obviously give better access to cover. Unfortunately of course the reinsurance market at this stage hasn't begun to develop any alternatives. So if multinationals want cover for their whole worldwide operations, it's almost impossible.
Eltham: But multinational programmes on a stand-alone basis can certainly be put into place. We have a number that are using captives to fund the primary, or excesses for more difficult territories, even down to different buildings.
Higgs: I don't think Pool Re can learn much from abroad, because I agree there's not a lot wrong with it. There are peripheral issues, for example the definition of terrorism is not as wide as perhaps it could be, and obviously the definition of terrorism goes back to the days of the IRA,when the focus was very much the type of activities of the IRA. You could say the events we're seeing now are similar in terms of being politically motivated, but there are animal rights and other forms of terrorism.
It could be argued that anti-capitalist demonstrations aren't necessarily targeted at government, and could be deemed to fall outside Pool Re - certainly a grey area there. You could also say that it's down to the exclusions that insurers introduced in the first place following 9/11, and obviously if it wasn't so sweeping as it was, then maybe that gap wouldn't be there on that side of the coin. But in the UK we have insurers like Royal & SunAlliance and other company markets, which are now prepared to wrap around the Pool Re cover for UK.
If we look at the one thing that the US did that was different to everybody else is that it tried to wrap casualty into the Tria regulations, although with the Tria being under review at the end of this year, the US Treasury seems to be recommending a backtrack from that now and pulling away from what it may deem to be non-catastrophic events, with the likes of the casualty type of risk.
But it may be a concern for some companies; on employers' liability, for example, there are a number of insurers that are limiting it to £5m. That is an area where for a mass loss of human life on the type of scale we've seen, there could be blame pointed at a company or an employer, and there are some concerns there.
There has been some lobbying to widen the remit of Pool Re, but I'm not convinced that the UK government will do anything to address that.
Eltham: You also have to remember that brokers don't set the agenda in terms of the information they get from clients, from their discussions with the insurance market. They obviously have the knowledge as to what the insurer is looking for, but it's the insurers that set the agenda in terms of the information to a large extent. There is more detailed information that the brokers want to know because it could affect their thinking in terms of offering advice on the designing of the programme, for example, but the actual empowered information comes from insurer needs.
Chair: Do we think some new products will come up in the next few years?
Eltham: In terms of definition, they tend to be technical, so it's picking up issues that have been there for some time. In Lloyd's we really pushed through and developed the return of what we call '007 coverage', which is a member of security services. Then you're in the realm of 'business secret agent'. Is that terrorism or is it actually an act of war? It's a very important clarification, which was actually addressed back in 1991 when Lloyd's came up with a solution. And what we've done is resurrected that and put it into specific policy language that Lloyd's has signed off, and there it is. But is that a new product?
Haggar: That's probably an example of the way the industry has changed and the fact that we do consult much more with partners. If anything good can come out of acts of terrorism, it has drawn us together as brokers and underwriters to deal with clients and help them to analyse the risks they're going to face and how they can make them smaller.
It's no good us just charging more and more money to cover more and more risk.
We want to try to work with clients to avoid these disasters happening where we possibly can, and if that can be called a new product, that is a product that has come out of these incidents. IT