BLG

Responses to Terrorism: Government backed insurance and other post 11/9/01 responses

Responses to Terrorism: Government backed insurance and other post 11/9/01 responses

Colin Croly

Head of the Reinsurance and International Risk team

Barlow Lyde & Gilbert

www.blg.co.uk

Colin Croly

Head of the Reinsurance and International Risk team

Barlow Lyde & Gilbert

www.blg.co.uk

BLG

UK APPROACH TO TERRORISM RISK: POOL RE

UK APPROACH TO TERRORISM RISK: POOL RE

Reasons for introduction:

IRA -

+ St Mary Axe

+ Bishopsgate

Restrictive cover available in the market to cover Terrorism risk

Reinsurance (Acts of Terrorism) Bill 1993

Parties involved:

Secretary of State

Pool Reinsurance Company Limited (“Pool Re”)

Reasons for introduction:

IRA -

+ St Mary Axe

+ Bishopsgate

Restrictive cover available in the market to cover Terrorism risk

Reinsurance (Acts of Terrorism) Bill 1993

Parties involved:

Secretary of State

Pool Reinsurance Company Limited (“Pool Re”)

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OBJECTIVES OF POOL REOBJECTIVES OF POOL RE

To ensure industry and commerce continue to be able to purchase terrorism cover to avoid disruption

To enable insurance market to function as normally as possible leading to Government intervention becoming increasingly remote over time

To incur zero cost to Government over period of years

Not expose insurers to undue risks which might threaten their solvency

To ensure industry and commerce continue to be able to purchase terrorism cover to avoid disruption

To enable insurance market to function as normally as possible leading to Government intervention becoming increasingly remote over time

To incur zero cost to Government over period of years

Not expose insurers to undue risks which might threaten their solvency

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FRAMEWORK AND FUNDING OF POOL REFRAMEWORK AND FUNDING OF POOL RE

Insurance policies continue to be issued by insurers

New mutual reinsurance company created - Pool Re

Over 200 members of Pool Re

Government reinsurance only available to Pool Re members

The funding of Pool Re

Premium (Pool Re fund) + 10% surcharge on members + investment

income - finally government

Pool Re Fund - £1 billion

Insurance policies continue to be issued by insurers

New mutual reinsurance company created - Pool Re

Over 200 members of Pool Re

Government reinsurance only available to Pool Re members

The funding of Pool Re

Premium (Pool Re fund) + 10% surcharge on members + investment

income - finally government

Pool Re Fund - £1 billion

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GOVERNMENT CONTROL OF POOL REGOVERNMENT CONTROL OF POOL RE

Underwriting Manual

Compliance with Manual - condition precedent

Government has absolute discretion to amend

Loss Occurrence

All individual losses arising in period of 12 hours of which proximate cause is same Act of Terrorism.

Underwriting Manual

Compliance with Manual - condition precedent

Government has absolute discretion to amend

Loss Occurrence

All individual losses arising in period of 12 hours of which proximate cause is same Act of Terrorism.

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ORIGINAL SCOPE OF AGREEMENT ORIGINAL SCOPE OF AGREEMENT

Coverage:

Fire / Explosions

Loss / Damage:

+ buildings and completed structures;

+ other property (including contents, engineering contractors and computers);

+ business interruption;

+ book debts

Coverage:

Fire / Explosions

Loss / Damage:

+ buildings and completed structures;

+ other property (including contents, engineering contractors and computers);

+ business interruption;

+ book debts

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POOL RE STRUCTURE

p o licy h o ld ers(in su red s )

m em b er*

p o lic y h o ld ers(in su red s )

m em b er

p o lic y h o ld ers(in su red s )

m em b er

p o lic y h o ld ers(in su red s )

m em b er

p o lic y h o ld ers(in su red s )

m em b er

p o lic y h o ld ers(in su red s )

m em b er

P oo l R e

H M G

* The members of Pool Re are the participating insurers.

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SUCCESS OF POOL RESUCCESS OF POOL RE

Has Pool Re achieved objectives?

Dealt with St. Mary Axe, Bishopsgate, Canary Wharf, Manchester

Fund never exhausted

Problems leading to change

Gaps in coverage where terrorism damage is not caused by fire and explosion

Government lobbied for change to fill gap in insurance/reinsurance coverage which cannot be obtained in the market: working group established under treasury chair.

Has Pool Re achieved objectives?

Dealt with St. Mary Axe, Bishopsgate, Canary Wharf, Manchester

Fund never exhausted

Problems leading to change

Gaps in coverage where terrorism damage is not caused by fire and explosion

Government lobbied for change to fill gap in insurance/reinsurance coverage which cannot be obtained in the market: working group established under treasury chair.

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POOL RE - REMIT EXTENDEDPOOL RE - REMIT EXTENDED

All risks basis

Scheme can now cover contamination, impact by aircraft or flood damage

Premium will be doubled for the more comprehensive policy

Option to backdate to 1 January 2002

Proposals for January 2003

Changes to the financing of Pool Re to encourage competition

Changes to make government arrangements more transparent in the public interest

All risks basis

Scheme can now cover contamination, impact by aircraft or flood damage

Premium will be doubled for the more comprehensive policy

Option to backdate to 1 January 2002

Proposals for January 2003

Changes to the financing of Pool Re to encourage competition

Changes to make government arrangements more transparent in the public interest

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ENCOURAGING COMMERCIAL CAPACITY BACK TO TERRORISM COVER

ENCOURAGING COMMERCIAL CAPACITY BACK TO TERRORISM COVER

Current retention £100k - provided by UK property policies

Low retention limits commercial capacity to re-enter market

Working group advised change

Insurers maximum liability will be capped per event, per year based on market share

Aggregate industry retention increased to £30m per event and £60m per year from 1/1/2003.

Limits will rise over next four years.

Current retention £100k - provided by UK property policies

Low retention limits commercial capacity to re-enter market

Working group advised change

Insurers maximum liability will be capped per event, per year based on market share

Aggregate industry retention increased to £30m per event and £60m per year from 1/1/2003.

Limits will rise over next four years.

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ALTERNATIVE OPTIONS TO POOL REALTERNATIVE OPTIONS TO POOL RE

Financial Instruments -

Catastrophe bonds - securitise liability in the stock market

“Captives” - allow companies to underwrite own liabilities

Europe - FERMA proposals

Problem for global reinsurers of patchwork national terrorist pools - multinational companies

Europe-wide pool to cover terrorism risk?

Financial Instruments -

Catastrophe bonds - securitise liability in the stock market

“Captives” - allow companies to underwrite own liabilities

Europe - FERMA proposals

Problem for global reinsurers of patchwork national terrorist pools - multinational companies

Europe-wide pool to cover terrorism risk?

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GERMANY & TERRORISMGERMANY & TERRORISM

September 2002 - Extremus AG

Cologne based company developed by the German government and insurers during months of negotiations

16 shareholders, including AIG Allianz AG Holding, Gerling, Munich Reinsurance Co and Swiss Reinsurance Co

Will insure commercial customers for terrorism-related losses that exceed €25 million

Designed to include three layers of aggregate cover to €13 billion.

The company has a target of writing business with a premium volume of 300 million to cover its costs

September 2002 - Extremus AG

Cologne based company developed by the German government and insurers during months of negotiations

16 shareholders, including AIG Allianz AG Holding, Gerling, Munich Reinsurance Co and Swiss Reinsurance Co

Will insure commercial customers for terrorism-related losses that exceed €25 million

Designed to include three layers of aggregate cover to €13 billion.

The company has a target of writing business with a premium volume of 300 million to cover its costs

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FRANCE & TERRORISM FRANCE & TERRORISM

January 2002 -

GAREAT created by insurers, reinsurers and Caisse Centrale de Reassurance (CCR), the state-owned reinsurer.

A central state-backed commercial pool for terrorism exposures, set up for one year, with an option to renew.

Management board made up of representatives from insurance and reinsurance companies.

Operates a four-layered excess programme.

January 2002 -

GAREAT created by insurers, reinsurers and Caisse Centrale de Reassurance (CCR), the state-owned reinsurer.

A central state-backed commercial pool for terrorism exposures, set up for one year, with an option to renew.

Management board made up of representatives from insurance and reinsurance companies.

Operates a four-layered excess programme.

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SPAIN & TERRORISM SPAIN & TERRORISM

In Spain, Consorcio de Compensación de Seguros (Spanish Insurance Compensation Fund - “SICF”)

Covers losses caused by extraordinary events, including;

Natural phenomena, terrorism, rebellion, riots, acts or actions of armed forces and security forces in time of peace

Automatically extends insurance coverage for extraordinary risks

Self-financing

Is state guaranteed

In Spain, Consorcio de Compensación de Seguros (Spanish Insurance Compensation Fund - “SICF”)

Covers losses caused by extraordinary events, including;

Natural phenomena, terrorism, rebellion, riots, acts or actions of armed forces and security forces in time of peace

Automatically extends insurance coverage for extraordinary risks

Self-financing

Is state guaranteed

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SPECIAL RISK INSURANCE AND REINSURANCE SA (SRIR)

SPECIAL RISK INSURANCE AND REINSURANCE SA (SRIR)

Luxembourg based company, created by Allianz, Swiss Re, Zurich Financial Services, Hannover Re, XL Capital and Scor, commenced business in June 2002

Operates independently of its founders with separate management and underwriting teams

SRIR is not a terrorism pool like those in the UK, Spain, France and Germany but will operate as a company

Luxembourg based company, created by Allianz, Swiss Re, Zurich Financial Services, Hannover Re, XL Capital and Scor, commenced business in June 2002

Operates independently of its founders with separate management and underwriting teams

SRIR is not a terrorism pool like those in the UK, Spain, France and Germany but will operate as a company

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SPECIAL RISK INSURANCE AND REINSURANCE SA (SRIR) cont.

SPECIAL RISK INSURANCE AND REINSURANCE SA (SRIR) cont.

Has a pledged capital of 500 million, which gives it a total capacity of 5 billion

Only offering limited property insurance and reinsurance. Not business interruption losses

Coverage is limited to 275 million per risk in a radius of 600 metres.

Plans to focus on European clients but with a world-wide geographical scope

Has a pledged capital of 500 million, which gives it a total capacity of 5 billion

Only offering limited property insurance and reinsurance. Not business interruption losses

Coverage is limited to 275 million per risk in a radius of 600 metres.

Plans to focus on European clients but with a world-wide geographical scope

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COUNTRIES CONSIDERING A GOVERNMENT RESPONSE TO TERRORIST RISK

COUNTRIES CONSIDERING A GOVERNMENT RESPONSE TO TERRORIST RISK

Japan: Marine and Fire Insurance Association no intention of abandoning plan to create a market-wide terrorism pool .

Australia: Insurance Council of Australia and Property Council have recommended pool scheme similar to Pool Re. No scheme currently in place .

Italy: ANIA hope that the Italian government will respond to proposal for setting up of government-backed reinsurance pools covering terrorism and natural catastrophes.

Japan: Marine and Fire Insurance Association no intention of abandoning plan to create a market-wide terrorism pool .

Australia: Insurance Council of Australia and Property Council have recommended pool scheme similar to Pool Re. No scheme currently in place .

Italy: ANIA hope that the Italian government will respond to proposal for setting up of government-backed reinsurance pools covering terrorism and natural catastrophes.

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GOVERNMENT RESPONSES IN RELATION TO AVIATION MARKET

GOVERNMENT RESPONSES IN RELATION TO AVIATION MARKET

USA - Air Transportation Safety and System Stabilization Act

Government-funded compensation scheme allied to limitation of liability of airlines

EU generally - State Aid implications

UK - “Troika” scheme

Proposals for the future

Equitime - war risk retention mutual for US Airlines

Eurotime - Proposed European mutual fund underpinned by government backing

Globaltime - ICAO propose Global system based on Eurotime.

USA - Air Transportation Safety and System Stabilization Act

Government-funded compensation scheme allied to limitation of liability of airlines

EU generally - State Aid implications

UK - “Troika” scheme

Proposals for the future

Equitime - war risk retention mutual for US Airlines

Eurotime - Proposed European mutual fund underpinned by government backing

Globaltime - ICAO propose Global system based on Eurotime.

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UK - TROIKA INSURANCE CO LTDUK - TROIKA INSURANCE CO LTD

Sponsored by three major aviation brokers: Aon, Marsh and Willis

Created and given FSA authorisation in space of a single weekend

Capitalised and reinsured (100% quota share) by HM Treasury

Managed by Global Aerospace

Underwrites third party liability for war and terrorism for UK carriers for difference between underlying limit available in market and pre-Sept. 11 limits

Initial policy period - 30 days from 24 September 2001- extended many times. Now to 30 September 2002 to allow group schemes to be established (BATA/AEA and IATA/ICAO: in latter case needing consultation with 180 members).

Sponsored by three major aviation brokers: Aon, Marsh and Willis

Created and given FSA authorisation in space of a single weekend

Capitalised and reinsured (100% quota share) by HM Treasury

Managed by Global Aerospace

Underwrites third party liability for war and terrorism for UK carriers for difference between underlying limit available in market and pre-Sept. 11 limits

Initial policy period - 30 days from 24 September 2001- extended many times. Now to 30 September 2002 to allow group schemes to be established (BATA/AEA and IATA/ICAO: in latter case needing consultation with 180 members).

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Further Issues Defining the risk: what is terrorism?

Further Issues Defining the risk: what is terrorism?

Post September 11 - have been discussions of clauses defining terrorism. A number of clauses are in existence. Two examples:

Pre 11/9/01: Pool Re -

“…an act of any person acting on behalf of or in connection with any organisation with activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government or any other government de jure or de facto”

Post 11/9/01: IUA - (G5IA/G57)

“An act or acts (whether threatened or actual) of any person or persons involving the causing or occasioning or threatening of harm of whatever nature and by whatever means made or claimed to be made in whole or in part for political, religious, ideological or similar purposes”

Post September 11 - have been discussions of clauses defining terrorism. A number of clauses are in existence. Two examples:

Pre 11/9/01: Pool Re -

“…an act of any person acting on behalf of or in connection with any organisation with activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government or any other government de jure or de facto”

Post 11/9/01: IUA - (G5IA/G57)

“An act or acts (whether threatened or actual) of any person or persons involving the causing or occasioning or threatening of harm of whatever nature and by whatever means made or claimed to be made in whole or in part for political, religious, ideological or similar purposes”

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CONCLUSIONCONCLUSION

Pool Re - success up to now

Expansion of cover agreed for Pool Re

Further developments -

more government backed terrorism pools; and

increase in private capacity for terrorism cover.

Pool Re - success up to now

Expansion of cover agreed for Pool Re

Further developments -

more government backed terrorism pools; and

increase in private capacity for terrorism cover.