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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”)
BLG
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
BLG
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.
BLG
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
BLG
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.
BLG
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
BLG
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?
BLG
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
BLG
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.
BLG
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
BLG
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
BLG
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.
BLG
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).
BLG
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.
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