The stalemate over decommissioning in Northern Ireland has raised bitter memories of IRA bombings in mainland Britain. Paul Rowinski looks at Lloyd's role in terrorism insurance today...
Once again, Northern Ireland's hopes for peace are in a critical phase, one in which the Irish Republican Army and its Protestant counterparts must disarm and hand in their weapons.
If the matter is not resolved son there might be a return to violence, which could include a bombing campaign on the British mainland. This would have major implications for the insurance industry.
Just a few weeks ago an IRA splinter group set off a device in Northern Ireland. Was this the beginning of a renewed call to violence set to diffuse across the Irish Sea and again return to these shores? The insurance industry does not think so.
Although aware that the risk is constantly there, reacting now appears premature. Those who insure against terrorism have taken a "wait and see" stance. Before premiums are hiked to reflect an increasing risk, the insurance industry watches and waits.
Kiln is one of the underwriting agencies at Lloyd's that insures against terrorism, through its commercial property insurance.
Like many other syndicates, Kiln used to be part of Pool Re, which was set up in 1993 as an independent body to provide terrorism insurance, with government backing. In effect, the government reinsures the pool. It was a response to a series of protracted bombing campaigns carried out by the IRA on the British mainland in the early Nineties. Kiln joined Pool Re during this time. Yet six months in, the firm decided to pull out.
Richard Lewis, terrorism underwriter for Kiln, comments: "We thought we could make more money by including terrorism in commercial property underwriting."
He adds that Kiln was adhering to Pool Re's fixed premiums, with not much prospect of making profit.
"We suddenly have flexibility although how much use that is at the moment is a moot point."
Decommissioning stalemate
This is so because, like other commercial underwriters, Kiln wishes to compete but the market is not too buoyant. The reason for this is that the threat of a renewed bombing campaign is not perceived as a real one at the moment, despite the latest decommissioning stalemate.
The reality is about 80-90% of those currently insuring against terrorism are doing so with Pool Re because that threat is regarded as minimal at the moment and this is reflected in the lowest premiums charged to customers by the government-backed body.
There is further evidence. Pool Re dropped its rates by about 85% in one fell swoop. Customers received this Christmas bonus on December 25, 1998. For the commercial sector this effectively spelt the end of effective competition.
"There is very little business at the moment. We have about 10% of the income we were writing about five years ago in the United Kingdom," says Lewis. "This could go to nothing."
He thinks Pool Re is now catering for about 95% of those that are insuring against terrorism but Pool Re itself still puts the figure more conservatively at between 80-90%.
High-risk category
Pool Re is not intended for profit-making but to act as a public service. It divides its insurance policies into zones, according to where your business is placed geographically. Zone A is regarded as the highest risk category, covering the City and Westminster specifically, zone B provides cover for those in central London and other major city centres. Zone C is somewhat larger – the rest of England, bar the West Country, Wales and Scotland, which are covered in zone D.
Pool Re's back is covered by the government and with that 'threat' still not perceived as real, premiums are likely to stay low. The point is confirmed further by what Pool Re chief executive Leslie Lucas described as the 'free reserve'.
This amounts to £446m, according to the latest available annual accounts, for 1998. This amount is the difference between assets and liability. The surplus means it can afford to keep premiums low, and as a consequence see off competitors in the commercial sector.
The pool's last pay-out is something of a distant memory for Lucas. The destruction of Manchester city centre on June 15,1996, was the last major incident that Pool Re and the terrorism insurers had to deal with.
Lucas adds: "If we do not have significant claims, it is unlikely there will be any change to the premiums upwards."
He stressed that Pool Re, made up of property insurers, and Lloyd's syndicates, will regularly review the situation for any changes. The directors will keep feeling the pulse, but the chance of reviving terrorism insurance remains for now unlikely.
Lucas is quick to dispel the fallacy that he is privy to inside information from the secret services or government circles about imminent attacks. His measurement, he says, is the market.
But Lucas did sound a cautionary note, referring to the uncertainty and unpredictability of IRA actions in the past and how we were all caught out by its previous attacks.
"There is the potential for something to happen and that is why people buy insurance. The reality is, you find out when it happens." But is it likely to happen again?
Following the recent dissident IRA faction bomb, prior to the stalemate over disarmament, Pool Re's formal position, was to "wait for an event to happen" on the British mainland. And it has not.
When pressed for figures of the number of policyholders, Lucas merely says that it is "holding up", suggesting no increase.
It could even be perceived that Pool Re is buckling under the downward pressure and that not only is the commercial sector suffering, unable to compete, but that firms are simply not willing to reinsure against terrorism at present, regarding other risks as higher priorities.
One could interpret a recent comment following the IRA faction bombing as an attempt to curtail the cynicism surrounding terrorism insurance.
A spokeswoman for Hiscox, Britain's largest commercial catastrophe reinsurer, said that the company had been aware of a persistent threat of terrorism "and we've been advising that the risks have not gone away". Neither however, are they omnipresent.
Resuscitating the sector
Lucas reports that 32 Lloyd's Syndicates are currently members of Pool Re. Some, like Kiln, left in the early stages.
Kiln may be struggling to occasionally resuscitate its ailing terrorism insurance sector with a customer. Others bravely stepped forth offering an alternative package to Pool Re – and did not survive to tell the tale.
Inbro CityGate, a former Lloyd's brokers, was proactive, reacting within weeks of Pool Re's Christmas 1998 85% premium rate cut.
First there were the comments of Carl Carter, the then group marketing director: "Pool Re's revised rating, taking effect on Christmas Day, took many Lloyd's underwriters and brokers by surprise.
"The severity of the reduction in rates seemed particularly strange in today's political climate.
"After all, while the government has released many of the terrorists, no weapons and, more importantly, no bomb-making equipment, have come out of circulation.
"A risk in London's West End was paying £23,000 before Christmas, it is now priced at £3,000."
Inbro Citygate responded, also offering a fixed rate, like Pool Re, to customers – for 36 months, and adding the flexibility of insuring only what the customer perceived as a risk, and not the all-encompassing approach of Pool Re.
The firm had first-hand experience of the IRA bombing campaigns in 1992 and 1993, ravaged on central London. On both occasions its offices were virtually destroyed.
It was then that insurers got cold feet about continuing to keep terrorism cover included automatically under material damage policy and the government formed Pool Re.
Inbro Citygate acknowledged it was the only major player and hoped to give Pool Re a run for its money but the company has since gone into liquidation.
As Sinn Fein's Martin McGuinness said weeks ago, as the Good Friday agreement appeared to lie in tatters: "There's no way in a million years that the dissidents or the rejectionists can even have a remote hope of winning."
If he is right, and the setback remains just that, with no renewed bombing on Britain's mainland, bringing back terrorism insurance will prove more than difficult.
