Attacks on London evoke increased interest in terrorist coverage

Following the recent terrorist bombing attacks in London – a coordinated attack where at least four bombs exploded in the city’s transportation system resulting in more than 40 casualties and hundreds of serious injuries – the U.S. Department of Homeland Security raised the terrorism threat level for mass transit to code orange–high–from the previous yellow–elevated–level. The heightened level applies only to regional and intercity passenger rail, subways and metropolitan bus systems.

Canada reacted in a similar manner. Public Safety Minister Anne McLellan tightened security for all transportation systems across Canada, specifically in Toronto and Montreal. Systems affected include Via Rail, CN and CP, local subways and mass transit systems. Canada reportedly appeared on an al-Qaeda list of targets because of the countries move to send troops to Afghanistan in support of the U.S. and as such Canada could be a target.

“There is no specific threat to Canada or Canadians at this time,” McLellan said in a prepared statement, “but you have to be prepared, you have to take all precautionary measures.”

In the UK losses from the bombings will likely tap the governments backed terrorism insurance pool, Pool Reinsurance Co. Ltd – in place since 1993. Pool Re – funded by premiums charged to commercial p&c insurers in the UK – covers commercial and property damage and business interruption from terrorist attacks-as well as losses from contamination, impact from an aircraft or flood damage-above a retention borne by participating insurers. The maximum retention borne by any participating insurer is set at 30 million (US$52.75 million) and is calculated according to market share. Pool Re has not yet determined whether the bombings are to be covered by the pool.

The recent terrorist attacks evoke questions and concerns regarding terrorism insurance, a topic widely discussed at the International Insurance Society’s 41st Annual Seminar in Hong Kong.

Karl Wittmann, a member of the board of management of Germany’s Munich Reinsurance Co. and the current IIS chairman, says because terrorism is directed against governments, governments have got to share in the financial repercussions.

Some reinsurers however, do not view the London bombings as having an immediate effect on the pricing for terrorism coverage because of the terrorism pool mechanism instead the attacks may increase the demand for terrorism coverage.

The attacks follow the release of a new study – “Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act” conducted by the RAND Center for Terrorist Risk Management Policy, Santa Monica, CA – that indicates insurers are failing to provide U.S. businesses with adequate terrorist attack protection.

The report says that terrorism insurance does not cover losses from domestic terrorist groups and that most policies exclude coverage for nuclear, biological and chemical attacks meaning current coverage is completely inadequate.

This study suggested Congress should move to fill these gaps in coverage by expanding the Terrorism Risk Insurance Act and extending it beyond its scheduled Dec. 31, 2005, sunset.

Furthermore, the report recommended that Congress consider proposals to lower the price of coverage by changing the terms of that federal backstop. The study also suggests the implementation of a national board of governors who would assess the performance of TRIA or a successor program.

Enacted after the Sept. 11 terrorist attacks, TRIA requires participating insurers to offer terrorism coverage. TRIA is also a prerequisite for the participation in a government-backed cost sharing program that helps cover insured losses from future acts of terrorism.