As the Commercial Market Expands Government Terrorism Mechanisms Pull Back

In response to the terrorist attacks of the 2000s, a number of governments established insurance-like mechanisms to address the catastrophic effects of a terrorist attack.  One of the early state-backed facilities is the UK’s Pool Reinsurance Company, Ltd. (“Pool Re”), which was actually set up in the 1990s to address events sparked by the unrest in Northern Ireland.

The Pool Re scheme, which is explained on its website, is somewhat similar to the government-backed legislative mechanism in the US, the Terrorism Risk Insurance Program, often called by its original acronym, TRIA.  With the expansion of the commercial insurance and reinsurance market into terrorism coverage, the US and the UK have modified their programs.  This post discusses a new development at Pool Re, which reflects the growing ability of the commercial market to handle terrorism risks.

At the time of the 2012 Olympic Games, Pool Re expanded to provide terrorism coverage for significant sporting and entertainment events.  The contingency cover provided protection where there was a loss during a major event and business was interrupted.  Pool Re agreed to insure contingent losses arising out of significant events because the commercial market was unable to provide the capacity necessary to address losses caused by acts of terrorism.

As underwriters have become more comfortable (not sure how) with predicting losses arising from acts of terrorism, the commercial market has increased its capacity to address these losses.  Given the limited nature of these government-backed programs, Pool Re has now stopped covering losses caused by acts of terrorism at events.  According to several articles, the insurers and reinsurers of the commercial contingency market no longer wish to cede their risks to Pool Re for sporting events, concerts and tours.  As Pool Re’s CEO stated: “As the commercial markets develop greater appetite and capacity, and there is therefore no longer a market failure, it is appropriate for us to withdraw and we are pleased that contingency cover is now available to insureds commercially.”

Government-supported insurance vehicles are meant to be “temporary” where there is either disruption or a lack of capacity in the commercial insurance industry.  We have seen an increase interest in the commercial market in flood insurance in the US, which may bring about a change to the National Flood Insurance Program at some point.  We have seen state-mandated auto and medical malpractice pools convert to commercial market vehicles.  So too with terrorism, we now see the commercial market expanding sufficiently to provide the necessary cover for events at least in the UK.

While it is true that a major terrorist attack may not yet be insurable in the commercial market, seeing the commercial contingency market replace Pool Re in the UK is a good sign of progress.

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