Terrorism Insurance & Pool Re

Transcription

1 BRIEFING PAPER Number 03198, 6 June 2018 Terrorism Insurance & Pool Re By Timothy Edmonds Contents: 1. Introduction 2. Pool Re 3. Scheme developments intranet.parliament.uk/commons-library

2 2 Terrorism Insurance & Pool Re Contents Summary 3 1. Introduction 4 2. Pool Re 5 3. Scheme developments How the Scheme has worked New Threats 7 Cover page image copyright SIS (MI6) Headquarters by Jim Bowen. Licensed under CC BY 2.0 / image cropped

3 3 Commons Library Briefing, 6 June 2018 Summary This note explains the present arrangements for obtaining terrorism insurance for buildings. Owners of buildings may choose to purchase this type of insurance, but it also is sometimes required by landlords, and tenants and leaseholders of commercial premises and blocks of flats may find themselves obliged to take out cover.

4 4 Terrorism Insurance & Pool Re 1. Introduction Terrorism insurance cover used to be included in standard commercial policies at no extra cost, but following a series of high-profile high-cost terrorism attacks in the City of London in 1992 and 1993, insurers began to impose a ceiling of 100,000 for this cover under their normal policies. A draft exclusion clause to this effect was recommended by the Association of British Insurers to its members. The Government therefore arranged, after consultation with the industry, to become a reinsurer of last resort for terrorism risks, thus allowing businesses to continue to obtain full terrorism cover. The vehicle was Pool Re, a Government-backed mutual reinsurer. The events of September 11th in New York prompted a rethink of the way in which cover was offered and on what terms.

5 5 Commons Library Briefing, 6 June Pool Re Pool Re was set up by the Reinsurance (Acts of Terrorism) Act 1993 which received Royal Assent on 27 May The system works in the following way. Beyond the minimum 100,000 level, if policyholders want terrorism cover they must arrange it separately. The policyholder deals with one of the participating insurers, which will quote in accordance with centrally set rates. The premium is placed by the insurer in the 'pool', and this pool is then available for participating insurers to draw on in the event of a claim arising. If the claims made exceed the value of the pooled funds, then the insurers would bear a small proportion of this additional cost through a 10% levy. Beyond this levy, the Government meets the remaining cost of claims. This level of terrorism cover is only available to those who have purchased it; the Government will not pay terrorism claims from uninsured parties. In July 2002 the extent of cover provided by Pool Re (and hence the coverage that commercial insurers could afford to offer) was significantly increased. The attacks on New York prompted the realisation that terrorist attacks might be more extensive and employ a wider range of devices than had been previously considered. Before, Pool Re only covered terrorist acts that caused damage to property through fire or explosion. Other losses caused by terrorism were in most cases uninsurable. However, as a result of the changes agreed, Pool Re now covers 'all-risks caused by terrorist acts, including damage from nuclear attacks, flooding and contamination. War risks are still excluded. The 2002 review also abolished the flat 100,000 per insurance event per policy excess. It was replaced by a more complex system of retentions based upon each event and an annual overall limit. These limits are shown below: Pool Re Retentions Per event Per Annum From 1 January 2003 millions Source: HM Treasury Release 23 July 2003

6 6 Terrorism Insurance & Pool Re 3. Scheme developments 3.1 How the Scheme has worked Although the principle of a state-backed reinsurance pool is generally supported, there has been persistent criticism that the charging structure of Pool Re is insufficiently flexible. Pool Re sets the policy rates centrally, and participating insurers must apply those rates - a mutual scheme would not work if members charged differential rates. This has meant that there is little scope for competition in the terrorism cover market since most insurers belong to Pool Re. The extension of cover in 2002, welcome as it was, had the side effect of substantially increasing premiums to businesses. Pool Re is also accused of inflexibility. For example, risks are based upon just four rating zones. Zone A covers Central London; Zone B includes inner London and the business districts of major cities; Zone C covers the remainder of England and Wales, excluding Devon and Cornwall; Zone D covers Devon and Cornwall, Scotland and Wales (unless Zone B applies). It also has three types of policy: standard commercial property; construction sites; and blocks of flats. Properties are covered for terrorism to the same amount of cover for the building which the ordinary building policy provides. A rate is set for each of the three types of policy within each zone, expressed as a percentage of the cover. Within each zone, every building pays at the same rate. Take a hypothetical example. If you have an office block which is covered for 10 million, and the rate for that zone is 0.14 per cent, the cost would be 14,000 each year to obtain terrorism cover. Insurance for domestic properties normally excludes cover for terrorism and acts of war. This exclusion allows insurers to offer policies that meet the broad needs of their customers at a more reasonable cost. This could not be done if cover were to be provided for an event such as war, which neither the insurer nor the insured is able to guard against, and which, if it does occur, cannot be mitigated by the normal pooling, or averaging, of risks by which insurers reduce their individual exposure to single events. Moreover, an insurer is usually unable to moderate its exposure to war risks through reinsurance, since reinsurers will not provide such cover. Other risks for example from nuclear fallout - will similarly also be dealt with by exclusion clauses; insurers can also seek to manage exposures through policy ceilings and excesses. While war risks and civil war have traditionally been excluded from many insurance policies, there can be problems of definition. Because an insurance policy is fundamentally a contract, when an event occurs which may be the subject of cover, it will be necessary to look at the policy closely to determine whether the event is indeed covered.

7 7 Commons Library Briefing, 6 June 2018 Where the policy wording leaves room for doubt, it may be necessary for the contract to be construed by the courts or arbitrators. There has been litigation in the past as to whether specific disturbances are of such a scale as to meet the definition of war or civil war (and so fall outside a specific insurance policy) or whether they fall short of war or civil war (and so are covered). 12 To guard against misunderstandings, several of the big domestic insurers, led by the then Norwich Union, re wrote their property insurance policies to clarify what was and what was not covered. This practice caused some confusion amongst consumers who believed that they were suddenly getting less insurance than they had before. In 2014, negotiations were held between government and Pool Re over the amount of premium income that should be due to government. Following a long negotiation, it was agreed, in November 2014, that the portion of the premium to go to government would rise from 10% to 50%. The deal also included extensions to what could be offered to businesses. In future, more cover could be offered to small and medium sized businesses outside of central London. 3.2 New Threats The increasing awareness that terror threats were no longer simply bombs or to physical events highlighted an omission from the cover which Pool Re offered. A press release set out the response in November 2017 to extend cover to cyber-attacks: Pool Re, the terrorism reinsurance pool, today announces that, from April 2018, it will extend its cover to include material damage and direct business interruption caused by acts of terrorism using a cyber trigger. The cover, which will exclude intangible assets, will be offered as standard to all policyholders which purchase terrorism insurance from Pool Re Members. This initiative is the culmination of more than two years of work. The coverage extension is based upon a research study which was commissioned from the Centre for Risk Studies at University of Cambridge Judge Business School, to further Pool Re s understanding of the nature of the cyber terrorism threat. 3 In March 2018 Pool Re announced further expansion of its cyber cover capacity: Pool Re today announced that it has renewed its retro programme and extended the cover to include material damage and direct business interruption (BI) caused by acts of terrorism using remote digital interference. The renewed cover, brokered by Guy Carpenter, has been increased by 100m to 2.1bn and has been 1 For example, Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham SS Co Ltd [1939] 2 KB 544 and Spinney s (1948) Ltd v Royal Insurance Co Ltd [1980] 1 Lloyd s Rep Pool Re Press Release 27 November 2017

8 8 Terrorism Insurance & Pool Re placed with an expanded panel now comprising 47 reinsurers, with Munich Re continuing to be largest market. The three-layer programme matches the cover provided to Pool Re member insurers, with cyber terrorism now included along with chemical, biological, radioactive and nuclear risks. This represents the most comprehensive and largest terrorism retro placement in the world. 4 In March 2018, the Financial Services Minister, John Glen, made the following short announcement: I am today announcing that the government intends to legislate as soon as parliamentary time allows to amend the Reinsurance (Acts of Terrorism) Act This amendment will enable an extension of the cover provided by the government-backed terrorism reinsurer Pool Re to include business interruption losses that are not contingent on damage to commercial property. I will announce further details in due course. This government remains committed to ensuring that businesses can continue to secure insurance against the financial costs of terror attacks. 5 Responding to this announcement Pool Re said: Pool Re today welcomed the Government s commitment to amend the 1993 Reinsurance (Acts of Terrorism) Act to enable it to extend its cover to include non-damage business interruption losses resulting from acts of terrorism. The reinsurer is currently restricted by the 1993 Act only to pay out if physical damage has occurred to commercial property. This means that businesses, inside a police cordon, that suffer financial loss through being unable to access their property or to trade, are only covered if there has been physical damage during a terrorist attack. Pool Re had identified the potential protection gap as a result of the spate of attacks across Europe in 2015/6. However, the terrorist attacks in Westminster, Manchester and London Bridge highlighted the actual impact of the gap in UK provisions for terrorism insurance coverage. This caused Pool Re to suggest its cover evolve to ensure continued efficacy in the face of a changing threat. It has already responded to the threat of a cyber trigger and from April 2018 Pool Re will extend its cover to include material damage and direct business interruption caused by acts of terrorism using a cyber trigger. 6 This measure was brought forward in the Counter-Terrorism and Border Security Bill introduced in June The Bill amends the 1993 Act by extending cover to business losses not caused by physical damage. Loss now includes: Loss falls within this subsection if (a) it results from interruption to business carried on in Great Britain, 4 Pool Re Press Release 1 March HCWS March Pool Re Press Release 22 March HC Bill 219

9 9 Commons Library Briefing, 6 June 2018 and (b) the interruption results from or is consequential upon acts of terrorism. As has been the case in the past the scheme has adapted to accommodate real life events. The Explanatory Notes give a recent example and the reasoning behind the clause: In the case of the June 2017 terrorist attack on Borough Market, there was limited physical damage to the market, but traders lost business as a result of the week-long closure of the market to enable the police to investigate the crime scene. As the losses incurred by Borough Market businesses were not consequential on physical damage to commercial property, any terrorism-related insurance backed by Pool Re and held by those businesses may not have covered such losses. While Pool Re is not the only reinsurer of terrorism risk in Great Britain, this gap means that some businesses are potentially uninsured for any business interruption losses linked to a terrorist attack but that were not as a result of physical damage. 8 8 Explanatory Notes, clause 19

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