Mirroring the U.S. markets, Sept. 11 has led to increased scrutiny of European terrorism insurance coverage. Previously, terrorism coverage was commonly implied in the wording of property and liability insurance contracts for nominal premiums. Now reinsurers are carefully assessing the severity and frequency of terrorism risk and have introduced specific exclusions as a result, reported Fitch Ratings. This will make it more difficult for primary insurance companies to pass terrorism-induced losses to the reinsurance industry.
According to Fitch analysts, this lack of terrorism insurance could result in the partial collapse of a well functioning insurance system, undermining economic stability. Fitch said that it favored government-sponsored structures and limited insurance market participation as the most efficient mechanism for providing long-term terrorism insurance capacity.
Coverage by country
In the UK, Pool Re, a pooled group of UK licensed insurers, has resources in excess of GBP1.0 billion, and, if losses exceed this amount, the national government steps in. When it was established, the group of reinsurers won licenses to cover fire and explosion losses, but currently UK insurers are lobbying to include losses from business interruption, liability, and chemical and biological risk. Fitch said it appeared unlikely that the extension would be granted as the Treasury preferred to encourage a market-derived solution instead.
At the beginning of 2002, France established its insurance pool, Groupement des Assureurs et des Reassureurs Attentats Terrorists. All French insurers are required to provide property and business-interruption terrorism risk. The losses exceeding the pool volume are absorbed by the French government through its state-owned reinsurance company Caisse Centrale de Reassurance.
Spain, however, has historically excluded terrorism risks, and coverage is made available through Consorcio de Compaensacion de Seguros, which was established in 1941 after the Spanish civil war. It covers losses resulting from extraordinary circumstances occurring in Spain, which can include natural catastrophes, terrorism and civil unrest.
Italy also has typically excluded terrorism coverage on locally issued property policies, said Fitch. Post Sept. 11, however, there has been limited terrorism insurance underwritten by Italian insurers. The maximum amount that can be written leaves much to be desired, as it is capped at a maximum sub-limit of E10 million. Germany presents a similar picture and has no government-sponsored program.
But the European insurance industry is currently looking into the establishment of a specialist insurer that would specifically provide coverage for terrorism risks on property, contents and up to E3 billion in business interruption. A proposed government vehicle would cover volumes beyond this limit.
While lobbyists in the UK and Germany insurers are pushing for government support for a wider breadth of losses associated with terrorism, it looks increasingly likely that this capacity will have to be picked up by other markets as well.
According to the Fitch report, recent developments in this market include certain insurance providers defining terrorism risk capacity limits. Currently, Berkshire Hathaway has a policy limit of US$500 million, AIG has a limit of US$100 million, Lloyd's provides up to US$150 million, Axis Specialty has a limit of US$150 million, ACE has a limit of US$100 million and Special Risk Insurance & Reinsurance Luxembourg SA has a limit of E275 million. "By combining available coverage limits provided by these insurers, property owners are able to obtain as much as US$1 billion in terrorism cover," said Fitch.