BI non-physical losses: the UK solution

With the Royal Assent being given to the Counter-Terrorism and Border Security Bill 2018 - allowing Pool Re to cover non-physical losses incurred following a terrorist attack -, the British market has set a precedent at global level, by finding solving a challenging issue born by the changed character of the terrorist attacks of the recent years.

Before the law was changed, Pool Re could only reinsure losses incurred if a company's premises had been physically damaged by terrorists. In the UK, the gap in insurance coverage was highlighted in the 2017 attacks on Manchester and London Bridge, where small and medium-sized businesses were shown to be particularly vulnerable with several caught behind police cordons or experiencing a reduction in footfall following the events. They suffered significant, and in some cases crippling, business interruption losses for which they could not be compensated, either because they had not purchased terrorism insurance, or because the cover excluded business interruption if their premises had not been damaged.

The same situation was encountered also in France, after the attacks in Nice (July 14, 2016: 85 killed, over 200 wounded), Germany - the attack at the Christmas market in Berlin (December 19, 2016: 12 killed, more than 60 injured), Sweden - a Stockholm pedestrian promenade and department store (April 7, 2017: five killed, over a dozen injured) etc. An ALLIANZ study mentions relevant examples, demonstrating the dramatic impact such events may have on the business in the surrounding area and even on businesses of national scale, as the airlines:

  • the attack on Paris' Stade de France, the Bataclan concert hall and surrounding areas in 2015 have significantly affected the tourists' inflow in Paris during the following months - France reported a 5.8% y-o-y decrease in air traffic, while hotel stays decreased by 10% y-o-y, in April and May 2016; overall, official estimations were that tourist revenues in Paris in the first half of 2016 were EUR 750 million lower y-o-y;
  • After the Nice attack, hotel reservations along the French Riviera dropped by as much as 30% y-o-y in the following months;
  • After the March 22, 2016 Brussels attack, local businesses have recorded BI losses up to EUR 30 million per day, according some estimations.
And examples may continue, summing up huge amounts. The most crippling effect suck terrorist acts have determined was that on the small businesses, for which ceasing operations for a short period proved, in some cases, fatal.

The British solution

"We have worked very closely with the government, and with the industry since it opted to mutualize the non-damage risk in 2017. Perhaps more importantly, we are already collaborating with business federations, local authorities, brokers and our Member insurers, all of whom need to have open conversations with their customers about just how much may depend on having this cover if the worst should happen," said Pool Re's Chief Executive, Julian Enoizi.

John Glen MP, Economic Secretary to the Treasury, added: "We will not allow terrorists to change our way of life. So, when businesses raised their concerns about a gap in insurance cover following a terror attack, we worked with Pool Re to come up with a solution. Today, we've changed the law to give businesses peace of mind, helping them to insure themselves against financial loss because of a terrorist attack, even if there is no physical damage to their property. This means businesses will be able take out new and comprehensive policies to protect them in the future."

The passing of the Bill marks a crucial development in UK financial resilience to the evolving patterns and methodologies of terrorism. Pool Re was set up in 1993 to protect businesses and the insurance industry from the impact of the IRA's mainland bombing campaign, which targeted high-value infrastructure and prioritized economic disruption. Within its legislative limits, Pool Re has paid hundreds of millions in claims over its 25-year history at no cost to the taxpayer.

However, today's terrorist threat to the UK is very different, with attacks here and across Europe since 2014 being more frequent and often less sophisticated. Although terrorists have targeted people indiscriminately, attacks have not necessarily resulted in physical damage to premises. This created a problem, given most terrorism schemes around the world were set up to primarily deal with damage to property.

Pool Re's Chief Underwriting Officer, Steve Coates, added "It's the sad reality that business-owners across the country now have a new set of perils that threaten their livelihoods. This amendment is a real turning-point for our industry's ability to deliver the comprehensive protection businesses have been waiting for, but they've got to make the jump and buy the policy, and we have worked hard to make the new cover as accessible and affordable as possible. I would encourage any business owner to speak to their insurer or broker about what their current policy includes, and ensure it is extended to deal with terrorist threats."

The amendment makes the UK's terrorism reinsurance pool the first in the world to extend its cover to include non-damage business interruption losses.

"Our priority has been to keep this as far as possible a private market solution and so it will be reinsured by us via a new program," said Enoizi. "As we continue to identify and understand the protection gaps which emerge and bridge them through this unique public-private solution, we are focusing on helping the industry to grow by ensuring it becomes more comfortable with the exposure and thus reclaims more and more terrorism risk as we have seen recently with growing retentions and being able to cease contingency cover altogether."

Besides the pooling solutions at works in different countries, the commercial terrorism insurance market is striving to offer its own solution that may extend coverage beyond the traditional terrorism insurance. Insurers have cautiously approached new areas of insurance coverage, reaching beyond traditional terrorism insurance products, such as "denial of access" and "loss of attraction" policies. Such policies are covering the losses suffered by a business because of the measures taken by authorities after a terrorist attack - as restricting access to a certain area surrounding the actual place of the attack, for security or safety reasons or losses suffered especially by businesses in the retail, hospitality and leisure sectors because of the decreasing appetite of travelers for places considered as risky in the aftermath of a terrorist attack.

Of course, beside the larger range of products available on the market, some action is needed also on the customers side, especially on the SME segment. "Larger businesses often have insurance and disaster recovery plans to recover quickly after an event. Smaller companies typically do not. It is estimated that fewer than 5% of small businesses have terrorism insurance policies," wrote Financial Times. And in all truth, losses that big companies can bear rather easily, may prove fatal for small undertakings.

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