Nations Need A Terror Cover Checkup: Consultants

Nations Need A Terror Cover Checkup: Consultants

NU Online News Service, April 6, 10:08 a.m. EDT?A consulting firm in the United Kingdom said its study of terrorism insurance in the United States, Britain and Europe has found governments have worked to improve the coverage situation since the 9/11 attacks, but more needs to be done.[@@]

Oxford Analytica of Oxford, England in its Daily Brief last week warned that in the wake of the Madrid train station bombing, governments still "need to examine carefully whether existing insurance arrangements can cope with the rising risk of man-made catastrophe."

Although the United Kingdom, Spain, France, Germany and the United States have adopted schemes to provide for terrorism coverage, Analytica said policymakers still need to "reassess the adequacy of existing insurance arrangements to withstand the shock from terrorist attacks."

Examining what the various countries have done, Analytica said France created a state-controlled pool providing terrorism coverage Jan. 1, 2002.

The French system provides for a pooling system to share risks among direct insurers and reinsurers, back-stopped by an unlimited state guarantee, for insuring terrorist losses in excess of 6 million euros ($7.2 million dollars), Analytica reported.

For 2004, direct insurers provide the first 250 million euros in coverage, based on a market-share allocation; the next 750 million euros in coverage is placed in the international reinsurance market, Analytica said.

The French government guarantees 500 million euros in additional coverage. If this guarantee is invoked, insurers will be required to reimburse these funds over a ten-year period. All amounts over 1.5 billion euros will be covered by the state-owned Caisse Centrale de Reassurance, which re-insures French insurance companies against "natural catastrophes", Analytica explained.

Analytica said 16 German insurers and international reinsurers created Extremus Versicherungs AG on Nov. 1, 2002. This insures about 900 German companies against property losses or business interruption caused by terrorism.

These companies pay premiums for this coverage. Analytica said German insurers and reinsurers operating in the German market provide up to 1.5 billion euros in coverage.

The consultants said an additional 1.5 billion in coverage is placed in the international reinsurance market, and the German government guarantees an additional 10 billion euros in coverage. The existence of the scheme has increased the availability of terrorism coverage in Germany, Analytica found.

The German government guarantee is set to expire in 2005, but it will likely be replaced by a similar arrangement, according to Analytica.

Spain has had some form of government terrorist insurance coverage since 1941. The Consorcio de Compensacion de Seguros is a state scheme that provides insurance coverage for "extraordinary risks," including terrorism Analytica said.

CCS coverage is included in policies issued by private insurers, which collect premiums on behalf of CCS. Following industry deregulation in 1990, companies were able to secure private insurance coverage for such catastrophic events, and CCS shifted to providing subsidiary coverage only, at minimum levels, in situations in which the private insurer fails to cover specific risks, or when such risks are covered but the private insurer is insolvent, Analytica said.

The consultants said CCS is expected to cover the bulk of the damage from the recent Madrid bombings.

In the United Kingdom, IRA activity in the 1990s led to withdrawal of international reinsurers from the U.K. market, which prompted the creation of a state-supported pool, Pool Re, Analytica noted.

In the event of Pool Re's insolvency, the U.K. government will act as the re-insurer of last resort. Private insurers set the premiums for underlying insurance policies, according to normal commercial arrangements (replacing a system where Pool Re set such terms); Pool Re reinsures its private insurance company members at rates set forth in the Pool Re tariff.

Analytica said although participation in Pool Re is not mandatory, pool protection is only available to pool members. About 200 insurers currently participate. Terrorism coverage for local risk is excluded in Northern Ireland, but the 1978 Criminal Damage Compensation Scheme does provide compensation for property damage caused by terrorism.

Analytica noted that in the United States, for claims under the threshold level supported by the Terrorism Risk Insurance Act, the insurance industry remains largely responsible for losses.

Although TRIA requires that terrorism coverage be offered on all primary policies through 2004, insured companies themselves elect whether to pay for this option. Only 25 percent have so chosen, Analytica reported.

The Treasury Department must decide later this year whether to require that such coverage continue to be provided for 2005. In general, reinsurers operating within the United States have chosen to exclude terrorism coverage from general catastrophe policies, although some reinsurers have chosen to offer limited separate stand-alone policies, Analytica said.

Under the terms of TRIA, the risk to cover such events rests with primary insurers and the U.S. government. The TRIA system expires at the end of 2005, and significant uncertainty exists as to whether it will be renewed, Analytica said. In addition, it said TRIA has been criticized for inhibiting the development of appropriate pricing of premiums for terrorism coverage, and for structural deficiencies that prevent insurers from laying off their terrorism risk to reinsurers.