Nerves subside in the terror market

Despite the wars in Afghanistan and Iraq, and bigger budgets and resources devoted to the problem by governments around the world, the threat posed by terrorism remains as potent as ever.

Sadly, the atrocity of 11 September 2001- three years ago - has been far from the last evil act of recent years, with this year's Madrid train bombings providing another graphic demonstration of the threat that exists globally. On 11 March 2004, 10 bombs exploded on four packed early-morning commuter trains, killing 191 people and leaving at least 1800 injured.

Understandably, the insurance industry has had to undertake some major readjustments over terrorist cover in recent years to respond to the new levels of threat. In the immediate aftermath of the events of 11 September, capacity was severely limited as insurers withdrew cover and rates rocketed, though in the intervening period matters have stabilised somewhat. Supported by government schemes such as Pool Re, some in the market believe that the industry has been able to return to a more attractive underwriting environment. Indeed, for the first time since 11 September, the world's largest corporate entities have started to return to 'traditional' insurance carriers, according to Julian Taylor, head of terrorism cover at Marsh.

"The immediate reaction to 9/11 was that prices were relatively high," he says. "Since then, I think it is fair to say that premiums have reduced dramatically. A number of multinationals post-9/11 said that the cost of terrorism cover was too high, but this year we have suddenly seen them buying it. It has been a sea change, with rates now much more reasonable."

He acknowledges that much of the change in rating - and hence the multinationals' return to the market - has come about through broker pressure: "We were an integral part of changing the outlook of the market. It is the broker's responsibility to point out that the World Trade Center is one event in 100 years of that magnitude. It has been hard work - there have been all sorts of things we've done, travelling, attending meetings and barraging (insurers)."

Situation stabilised

Paul Wake, senior property underwriter at Norwich Union, agrees that the UK market is now much better than it has been: "Things have settled down a lot. Pool Re extended the cover it could provide in August 2002. Previously, it offered fire and explosion only, but that was extended to cover all risks, including chemical, nuclear and biological, in January 2003. Things have been fairly static since then. Brokers now know where they stand and the extent of cover available seems pretty well known. With regard to Pool Re, I can not imagine that the extent of cover provided, or the price, is likely to change in the immediate future."

Graham Heale, underwriting director for property at Royal & SunAlliance, also agrees that the situation nowadays is better than it has been for some time.

"In some small measure, I think there is a degree of market stability but, in many ways, that existed prior to 11 September, as the vast majority of cover was provided by Pool Re," he explains. "Prior to 11 September, it followed a fairly strict tariff system. Unlike alternative markets, such as Lloyd's, most of the cover was therefore provided at a fixed rate. Following 11 September, the Treasury was keen to see more competition, so we have moved from a very stable situation to one where there is much more competition. Pool Re now charges as much as RSA's others reinsurers on a portfolio risk, and it has brought about a change in pricing."

He does not want to suggest that all is rosy, however, when it comes to terrorism cover: "The (Pool Re) arrangements changed and that gave rise to some confusion, but the industry has done a lot, in conjunction with our broking colleagues, to inform clients. Brokers have a key role to play in explaining slight differences in coverage and pricing, which can be fairly esoteric. Now each insurer has its own aggregate deductible. Pool Re's retention is being reduced and the industry is potentially taking a larger share of the action. Pool Re is becoming something that is more in the background."

Commercial interest

But, Wake is dubious about the feasibility of a significant commercial alternative arising: "Post 9/11, capacity for terrorism evaporated overnight. Only schemes such as Pool Re enabled the industry to provide coverage. We will start to see the emergence of a limited commercial market, but I do not see it at the moment. There is a market, but it is very carefully controlled."

The extent to which the commercial market has an increasing appetite for terrorism cover is indeed open to question. Aside from traditional stalwarts at Lloyd's such as Hiscox - one of the few players to offer an alternative to Pool Re even prior to 11 September - some other insurers have demonstrated a willingness to become more involved in the sector.

For example, last year saw a consortium of Lloyd's insurers support a new package called Global Political Insurance, put together by broker BPL, which covers companies operating in emerging markets against the full spectrum of political violence, including terrorism. The coverage includes acts such as riots and lootings; uprisings; rebellions and coups; and wars and civil strife. According to BPL Global, the product helps to fill an important gap in the market caused by the exclusion of war and related risks from general property insurance policies and the limitations of government-backed terrorist cover. The policy is underwritten by several Lloyd's insurers, including Beazley, Catlin Underwriting Agencies, Hiscox Syndicates, Liberty Syndicate Management and Wellington Underwriting.

Such schemes aside, when it comes to the sort of core property cover offered by Pool Re, however, the stand-alone market has some way to go, according to Steve Dalchow, director of broking for Aon's counter-terrorism and political risk division. "More insurers are saying they will be members of Pool Re because it is difficult to compete on rates otherwise," he says. "A lot of people took the decision to compete in the property market by joining Pool Re."

He adds that, at the moment, the stand-alone market is reasonably limited, with only four Lloyd's syndicates - with capacity of some £50m - that are not members of Pool Re, and Bermudian companies offering capacity in the region of £100m.

Pool changes

Nonetheless, Dalchow says there is an opportunity for the stand-alone market to develop given the changes that Pool Re has recently undergone: "The retention that carriers are being asked to carry is dependent on how much they cede to the pool. Last year the maximum retention was £30m one occurrence and £60m aggregate. This has risen this year and is going up next year as well. All of a sudden these guys have an additional burden on their balance sheet. With Pool Re moving to all risks, someone has to pay for such potential losses."

Marsh's Julian Taylor agrees that there are difficulties with the current set-up, suggesting that the mechanics of the market are not right if the government wants commercial carriers to take more terrorist cover on board: "The government does seem to be looking to the private market for a solution, and if that's the intention I do not think they and Pool Re are going about it the right way. If you are a member of Pool Re, you aren't allowed to write stand-alone cover over a limited capacity of £50m to £60m. That is not allowing the market the freedom to develop."

Nonetheless, he says that Pool Re has proved to be a very successful template for similar schemes overseas, such as the Terrorism Risk Insurance Act in the US, where coverage has recently been extended for another year, allowing the likes of AIG, FM Global and Ace to start including terrorism cover again on a limited basis.

Martyn Quartermaine, a property specialist at Heath Lambert, also acknowledges there are difficulties as far as the UK developing a commercial terrorism market is concerned and suggests that, if there is to be a bigger stand-alone market, it will come from Bermuda rather than London.

However, he says that, from a client's point of view, the situation is somewhat better than it has been, especially in terms of policy wordings: "Some insurers have realised that terrorism cover can be used for competitive edge - not from a treaty point of view, but in terms of rates and coverage, which is now wider, moving to an all-risks basis. A lot more insurers have joined Pool Re to give coverage to their clients. Captives can join Pool Re as well; and if they do not want to, they have to buy an adequate stop-loss on their cover."

He adds: "I would say that insurers are now continuing to review terrorism cover. For example, NU and RSA now offer wider wordings than Pool Re on property risks, and the market is becoming much more receptive to wider cover."

He says that public liability is probably the main mover in terms of terrorism cover at the moment: "Until this year, PL terrorism was an exclusion, with most insurers staying silent on the issue, though some are now actively writing it back in."

Cover still incomplete

Despite the change in wordings that have been adopted by UK insurers to incorporate a wider definition of terrorism, and indications that more companies are willing to provide cover for areas such as PL, gaps still remain.

According to research undertaken earlier this year by Watson Wyatt, for example, many companies that have insured their employees' lives may find they are not covered should they be affected by an 11 September-style terrorist attack. This is as a result of the introduction of exclusions or single-event limits that cap the overall claim value to single 'events'.

The survey found one or more such exclusions in half the policies it examined for employee life insurance, health and disability insurance in 47 countries.

Dalchow adds that the area of exclusions is one of the main difficulties that still exists. Pool Re simply does not cover all types of terrorism at the moment and is not quick to update its own definition of terrorism, which was essentially formulated to respond to the environment of 1993, when the pool was established. "There is still the potential for a grey area with clients," he warns. Nonetheless, he is optimistic that the market can move in the right direction and stresses this is still an area that is in flux: "It's still very much a developing market and will be for a number of years," he comments. Next move: HM Treasury.