Terrorism Insurance - The Government's Response

Author:Ms Shelagh McKibbin
Profession:Herbert Smith

Following the Treasury press announcement of 23 July 2002, several

important changes to the Pool Re scheme are to be put into effect.

In way of background to these changes, Pool Re was set up in 1993

following the IRA attacks upon the City of London which led insurers to

withdraw from the provision of terrorism insurance for commercial

property. The purpose of Pool Re was to ensure that terrorism cover would

still be available, with H.M. Treasury acting as a reinsurer of last


As originally constituted, Pool Re provided reinsurance for damage to

property caused by acts of terrorism caused by fire and explosion. Pool Re

did not supply cover against other forms of terrorist attack. Damage

caused by war, or by nuclear devices, was specifically excluded. A

ìretentionî arrangement was also operated, under which insurers bore the

first amount of a claim, usually up to £100,000.

After the terrorist attacks of September 11 2001, and subsequent

incidents such as the anthrax scares in the USA, concern was raised that a

wider range of risks would need to be reinsured to take account of the

potential range of possible terrorist attacks. After representations from

the insurance industry expressed grave concern about the defects in Pool

Re's cover, a government and industry working group was set up to examine

the necessary changes. Accordingly, several changes to the Pool Re scheme

are to be put into effect, either in the next few weeks or from 1 January


In the next few weeks the following changes will be effected by a

unilateral variation of the Pool Re Underwriting Manual:

The cover provided by Pool Re will be extended to cover ìall risksî

rather than ìfire and explosionî, allowing the scheme to cover impact by

aircraft or contamination for example.

Premiums for the extended cover will be calculated at double the

premium on the existing cover. Insurers may choose as to whether they

have their cover backdated or not. These changes should be available in

the next few weeks, with an option to backdate cover to 1 January 2002.

From 1 January 2003 the following changes will also come

into effect:

The clause of the policy excluding liability for damage caused by

nuclear devices is to be deleted.

Insurers will be free to set their premiums for underlying policies

according to normal commercial arrangements.

The retention arrangements are to be changed. At present, insurers

bear the first amount of any claims upon a...

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