July renewals are looming and insurers keep tightening up their wordings. Helene Dancer reports
With 1 July renewals looming, insurers are looking closely at their terrorism wordings.
The 11 September tragedy has hit the industry hard and new revisions are inevitable.
There is a strong feeling in the market that change is necessary, but there is no common ground for implementation. This seems to be a very sensitive issue and insurers will only comment off the record and are not entirely certain about the extent of the changes.
Some insurers adapted their terrorism clauses for the 1 January reviews, but are planning additional changes for next month's renewal. One insurer said it would be excluding casualty insurance from 1 July, in addition to exclusions already in place.
Another market source said that after this renewal season, there would be significantly limited cover for employers' liability (EL) and public liability (PL).
"With PL, there won't be the limits once available and there will be an exclusion on target risks," he said. "With respect to personal accident and household cover, some companies have put terrorism exclusions on nuclear, biological and chemical attacks only."
Tighter wordings
A senior lawyer for a leading insurance law firm said he has assisted clients on new terrorism wordings based on their instructions, but could not go into more detail. He said he could only tell the downside of the effects of terrorism. "Wordings have become a lot tighter. Terrorism exclusion was not a concern until 11 September and there is now the issue of what the term terrorism includes.
"No one thought of anthrax scares, for example, which involve many different incidences. All are hotly contested, so tighter wording helps in this situation," he said.
The definition of terrorism has been widened since the events of 11 September. In December last year, the Non-Marine Market Association (NMMA) issued revisions of the original terrorism exclusion endorsements. By January 2002, four main clauses emerged, which exclude terrorism exposure in varying degrees.
These clauses are much more specific than the terrorism definition to which Pool Re, the state-backed terrorism reinsurer, adheres. Pool Re covers only damage or business interruption, resulting from fire and/or explosion. This is a problem because it essentially leaves a gap in the market. If insurers are excluding terrorism according to the wider definition, what happens when there is an act of terrorism, which is not within Pool Re's remit?
This is causing concern in the industry and insurers are hesitant when changing their policy wordings. One insurer said: "We are reluctant to go as far as we have to because of the more detailed definition of terrorism." A market source said there is a strong need for Pool Re to change its definition and "pick up the pieces" in the market. Many insurers have echoed this concern and suggest that Pool Re should be used as an institute of last resort; but there is a political bent to this argument. Should the government put taxpayers' money on the line?
Wider definition
The government recently told the insurance industry it would not consider any new legislation without a "compelling business argument".
But it is not just the government's stance that is worrying the industry. Since 11 September, reinsurers are limiting their exposure and driving the wider definition of terrorism.
Munich Re has new limits of liability, which are risk-specific and there is now more transparency in each risk. A spokeswoman said the company is now looking at "reinsurance on a speculative basis" and now has a 14-day period of cancellation on a treaty. Insurance will then only cover 14 days after an event, if Munich Re decides to cancel the agreement. She said that there are only real changes in medium to large businesses with big industrial risks.
Gerling Re facultative property division director Christian Friederichsen helped write the basic terrorism guidelines within his company. He said: "Gerling Re supports the exclusion of terrorism, especially for large commercial and industrial risks, where a potential for catastrophic loss is possible."
"On the other side, we support all kinds of [national] initiatives to set up pooling instruments, ideally with government support, as this is the only way to generate enough capacity to cover ultimate client's needs, which can easily exceed ¤1bn (£0.64bn) in limits for a large industrial risk."
He went on to say that to find cover for terrorism now is impossible unless there is a national mechanism to find cover.
From the UK perspective, the Association of British Insurers (ABI) says it is working with the government to extend the service of Pool Re, so there are no gaps in cover. It says it is not looking at standardised wordings for this reason.
No consistency
The problem remains, however, that some insurers are calling for a homogenised pattern for change. As one broker commented: "If all insurers sat down and worked out a common goal and aim, things would be a lot better. Right now, no two wordings are the same."
Another market source commented: "The message is that talks with the government are not going anywhere so the market is now restricting cover.
The market is looking to underwrite individual risks, but is excluding risks in catastrophic areas."
