There have been a number of high-profile terrorist attacks around Europe in recent years and the UK has been the victim of several of these events, which have included the Manchester, London Bridge and Westminster attacks. They typically target innocent bystanders and are seemingly designed to terrorise the public. But they can also incidentally harm businesses. Will their insurance respond? Here, it is useful to set out some history.
The IRA had been carrying out a bombing campaign in Northern Ireland and on the UK mainland since the 1970s, usually targeting people. But in 1992 it adopted a new tactic when a huge bomb exploded outside the Baltic Exchange in the City of London, causing massive property damage. This raised questions as to whether property insurers would simply exclude terrorism from their policies – a development which might have forced some businesses out of London.
The solution was ground-breaking: insurers agreed to maintain terrorism coverage for mainland UK commercial properties, on the basis that they would pool that exposure by ceding it to a newly-created mutual reinsurer (Pool Re) that was ultimately backed by the UK government. This was enshrined in the Reinsurance (Acts of Terrorism) Act 1993. The move was timely. In 1993 another massive IRA bomb caused extensive damage in the City: to date it is still the largest single loss paid by Pool Re.
The arrangement has worked well over the last 25 years. Insurers pay premium to Pool Re for the terrorism cover and each of them has a retention that depends upon the size of their terrorism insurance portfolio. The UK government stands behind Pool Re as a reinsurer of last resort, and it too receives a premium. Most types of commercial property can be covered under the scheme, including contents, site property, construction projects and plant and machinery.
Roll forward to June 2017, and the ISIS-inspired attack on London Bridge. The three assailants drove a van into pedestrians and then launched a knife attack in nearby Borough Market, killing a total of eight people. Subsequently, businesses in the area suffered substantial loss of revenue as they were behind a police cordon for 11 days1. Commercial property insurance policies included cover for business interruption, but (usually) only if it arose from damage to the policyholder's own property, which was not the case for most involved here.
The London Bridge and Manchester attacks in 2017 prompted much discussion about this gap in insurance coverage, with special reference to small and medium-sized businesses that are particularly vulnerable to the effects of such attacks2.
In response the UK government has recently amended the Reinsurance (Acts of Terrorism) Act 1993 to allow Pool Re to pay out for non-damage BI losses resulting from acts of terrorism. We understand that this explicit non-BI cover will be a world's first for terrorism pools3.
At the same time Pool Re recognises that it should not force property insurers to cede types of terrorism risk for which there is abundant capacity in the private market. Accordingly in January 2019 it announced that contingency cover (e.g. event cancellation) against terrorist acts would be returned to the commercial reinsurance market.
Perhaps over time this will also happen for non-damage BI. Some insurers had already started to offer a certain amount of non-damage terrorism BI coverage even before Pool Re did so, such as loss of attraction policies that respond in the event of terrorism attacks within a certain radius to the concerned policyholder4.
Conclusion
The creation of Pool Re and its ability to adapt to changing threats reflect very positively on the insurance industry and the UK government. The arrangement has enabled British businesses to continue to purchase policies that include terrorism cover, without which an attack could lead to insolvency. At the same time the pooling arrangements and the backing of the UK government protect individual insurers against a destabilising aggregation of terrorist losses.
The Clyde & Co UK team has advised our clients extensively in relation issues arising from terrorist attacks in the context of regulatory concerns, policy wordings and insurance claims arising from these incidents.
Footnotes
1 https://www.bbc.com/news/uk-47217649
2 https://www.insurancejournal.com/news/international/2019/02/13/517548.htm
3 https://www.willistowerswatson.com/-/media/WTW/PDF/Insights/2018/05/pool-re-broadens-its-reach.pdf
4 https://www.hiscoxlondonmarket.com/pool-re-reflects-changing-terror-threat
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