Global Government Reinsurance Programs for Terrorist Risks
The following document provides a review of disaster insurance programs in Japan, the U.K. and New Zealand. It is encouraging to hear most European countries have established, or plan to create government reinsurance programs for terrorist risks, but this will certainly not come without a few headaches along the way, as country to country alignment of policy can indeed prove to be complex (even more so in the aftermath of the horrific terrorist attacks in Madrid). The primary stumbling blocks have to do with a few key areas. For one, the subsidies under such programs discourage risk mitigation (e.g. companies who spend more money on security or facility redundancy were not able to share in lowered risk through reduced premiums); secondly, the risk classifications are often inadequate and vague (e.g. in Japan, the government distinguishes between only two types of dwellings in four rate zones and fail to adjust for building age, structural integrity and underlying soil conditions – factors we have previously cited in this forum); finally the setup of these types of programs do not offer total risk diversification, as they tend to retain all terrorism risk within a specific country, instead of through a global reinsurance pool. Despite the challenges, programs such as Pool Re demonstrate that with a little commitment, all things are possible.
Pool Re was a vehicle created in 1993 by the British Government in response to terrorism risk associated with the IRA, and was established as a reinsurer of last resort, as private insurers reduced their coverage for terrorism. It provided a mechanism that effectively allowed participating insurers to reinsure the risks that arose from terrorism. Obviously, a great deal can change in ten plus years, thus continual tweaks have needed to be made to these mechanisms in order to maintain their relevance. For example, in the wake of the terrorist attacks of 2001, industry representatives in the U.K. began expressing their concerns about the widening gap between Pool Re coverage and that provided by reinsurers. It became obvious that some of the terms specified in the original document had become severely outdated. For instance, earlier versions of Pool Re covered commercial property damage and business interruption costs that arose from an act of terrorism which results in “fire or explosion.” This wording would therefore not cover event terrorism that caused other kinds of damage.
Accordingly, changes have been made and it would seem that the working group that oversees this process is continually working to ensure the nuances of this initiative remain robust. Some of the more significant changes that have been made to this document include an amendment that caps the amount of losses an insurer can incur, as well as reversing a former exclusion which had existed under the scheme for damage caused by nuclear devices. A tidy summary of some of the changes has been listed in this document by AON, in that also presents some of the challenges that lie ahead:
The deletion of the nuclear exclusion is also to be welcomed. It was not a realistic possibility that the war risks exclusion would be deleted, but it is notable that all forms of ‘cyber’ attack will excluded and in general there is still a requirement for physical damage to be caused. The use of contaminant chemical or biological agents primarily intended to cause injury to persons would not necessarily be construed as ‘damage’. The onus would be on the insured to show that actual physical damage to property, with resulting business interruption if applicable, has occurred.”More than anything, this demonstrates how the nimbleness and flexibility of policy makers, can overcome extremely complex circumstances. Both public and private sector policy makers in the U.S. who are currently wrestling with how to reconcile the pending expiration of TRIA can look across the pond to see that logical change is certainly achievable – all it takes is getting everyone on the same page.