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

1. 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

2. 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”)

3. OBJECTIVES 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

4. FRAMEWORK 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

5. GOVERNMENT CONTROL OF POOL RE • Underwriting Manual • Compliance with Manual - condition precedent • Government has absolute discretionto amend • Loss Occurrence • All individual losses arising in period of 12 hours of which proximate cause is same Act of Terrorism.

6. 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

7. POOL RE STRUCTURE * The members of Pool Re are the participating insurers.

8. SUCCESS 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.

9. POOL 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

10. 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.

11. ALTERNATIVE 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?

12. GERMANY & 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

13. 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.

14. 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

15. 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

16. 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

17. 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.

18. 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.

19. UK - 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).

20. 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”

21. CONCLUSION • 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.