Insurance industry warns on companies' terrorist cover

Companies have been warned they face being left without insurance cover for nuclear, biological and chemical terrorist attacks after the Treasury threatened to withdraw support for a multi-billion pound subsidy fund.

Leading risk managers and insurance brokers said there would be scant provision to manage the costs of such incidents if the Treasury followed through on a threat to end an unlimited backstop for the Pool Re scheme.

Government officials have told insurers they will remove backing for Pool Re, established 21 years ago during the IRA's attacks, unless they agree to a "substantial increase" in the fees they pay for receiving a state guarantee.

John Hurrell, chief executive of Airmic, an association of corporate risk managers that comprises 450 of Britain's biggest companies, said: "There is a dramatic undermining of the Pool Re scheme by actions being taken the Treasury."

"The implication of what they're doing is that they're robbing the future to pay the present."

He added that it was "extraordinary" that officials appeared to be trying to push through the changes in funding without holding a consultation. Provision of adequate terrorism insurance was "absolutely critical", he added.

Terrorism cover is among the biggest insurance costs for large companies. Banks, retailers and property companies typically spend tens of millions of pounds a year on premiums.

Pool Re, funded by premiums on insurers, meets commercial property claims arising from terrorist attacks. If losses from an attack are so large that they exhaust the scheme's funds, which stand at £5.5bn, the Treasury steps in to make up the shortfall.

In return for this guarantee, the government charges a fee of 10 per cent of Pool Re's annual premium income, paid by insurers.

The Treasury now wants to raise the fee for the first time since Pool Re was set up as part of a push to make savings across government, the Financial Times disclosed last week.

People familiar with the matter said officials were demanding a more than five-fold increase. Terms are confidential.

David Cheales, a terrorism insurance broker at Lockton, said that if Pool Re was wound up, companies "may or may not" be able to secure coverage for conventional terrorism risks.

But he added that for NCBR [nuclear, chemical, biological and radiological] risks, there "wouldn't be sufficient capacity to satisfy demand".

For those risks, the insurance market typically put limits of only about £100m for each policy because the potential costs are so large and the industry struggles to model the risks.

Some industry insiders said that without Pool Re, companies would assume that the government would effectively meet the costs of a catastrophic terrorist attack in any case - without receiving any annual fees.

"By being too greedy if you like and over egging the pudding, it [the Treasury] is at risk of getting nothing," Mr Hurrell added.

Another industry insider said the government was being "very short-termist". "They are actually going to end up nationalising the risk and privatising the profits in this."

Two people with knowledge of the matter said government officials had privately threatened to legislate to ensure the continued provision of terrorism insurance if insurers did not agree to its terms. The Treasury has denied such a threat had been made.

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