Select Committee on Defence Minutes of Evidence

Memorandum submitted by the Association of Insurance and Risk Managers (10 April 2002)


  The Association of Insurance and Risk Managers (AIRMIC) has 970 individual members representing some 450 organisations, including over 75 members of the FTSE 100, 40 universities, 20 major charities and 20 local authorities and police authorities. It was founded in 1963 as a forum for the buyers of insurance and has since broadened its activities to include all aspects of risk management including business continuity and disaster recovery.

  In preparation for this submission opinions were sought from a wide range of different organisations including loss adjusters, insurance brokers, insurers, the Institute of Civil Defence and Disaster Studies, the Information and Assurance Advisory Council, major global corporations, local authorities in London, St John's Ambulance, the AIRMIC Retail group and various transport companies.


  Three key issues which could affect resilience were identified:

    —  The British Government has far less direct control over the National Infrastructure than it did 20 years ago as a result of privatisation. BP, BT, BA, the National Rail Network, the National Grid, British Gas, the Water companies, the Electricity generators are all organisations which the British Government had some degree of control over in the past which allowed it to co-ordinate preparation for a major incident and to react in a co-ordinated fashion. This co-ordination and control was a form of built in resilience.

        The proliferation of companies in each previously monopolised and publicly owned sector of national life makes co-ordination by Government today more difficult, although there is an advantage in having a more dispersed management of the sectors in event of an incident. The incremental relinquishing of control over many years has resulted in significant gaps in the network of communications and understanding required for resilience.

    —  "The Strength of a country is not in the height of its castle but in the mind and hearts of its people"—Japanese proverb. There is a need to help citizens be more resilient and through their resilience then communities will be more resilient. The benefits from having a populace educated in first aid extend far beyond situations of extreme threat.

    —  The Cabinet is the key risk management group for the country. Joined up government requires that if the terrorist threats are now being seen as lasting years or even decades and the insurance industry is incapable of providing adequate cover in the face of potentially huge uncapped losses then the Government has to accept that it has a duty to stand as insurer of last resort as well as assuming the physical risk management of the terrorist threats. Industry is willing to pay for cover but it needs as much certainty and clarity as possible in order to invest. In the aftermath of an attack lack of certainty as to who will meet claims impairs resilience. It also needs Government investment in security to combat threats which are not in industry's power to deal with.


1.  What the public sector could learn from the private sector with regard to resilience in the face of an extreme threat

  General view was that the emergency services and the military are highly skilled in their response to extreme threats when they occur. The anticipation and possible prevention of extreme threats is an area where private sector tools could assist.

  These might include:

  1.1  Probability models used by the insurance industry to identify areas and times of greatest likelihood for threats to occur.

  1.2  Dependency risk models which can map the full range of dependencies for the security of those areas and times identified above. These exist within private industry.

  1.3  The provision of discretionary budgets and powers to public servants so that, in times of need, decisions can be made as fast as they would be in the private sector.

  1.4  Communication to the general populace in areas of greatest threat in a timely, positive and constructive way, giving them an opportunity to be players and not just spectators. Public sector should benchmark their communications response with the best of the private sector.

  1.5  Standardisation of equipment across the emergency services for new threats such as bio terrorism.

  1.6  Willingness to learn from best practice in other countries and to have contingency plans to use foreign expertise where appropriate. Prepare to accept help.

  1.7  Public sector buildings, especially hospitals, need to follow best private and military practice in having built in resilience in their systems and structures. Just meeting the minimum for building regulations is not sufficient.

2.  How the private sector could assist the public sector

  2.1  Private sector companies in selected industries should form a support network.

  This should be done with the local emergency services or with national services after consultation between the parties.

  2.2  Private companies should commit to rehearse their contingency plans on a regular basis.

  This should be done in conjunction with the local emergency services and the larger ones should take responsibility, as at Y2K, for their supplier networks, thus extending and deepening the area of resilience.

  2.3  Private companies should accept secondments from the public sector.

  Where best practice has been identified, in say communications or IT resilience, then public sector staff should be seconded to learn and to improve the networking between the sectors.

  2.4  Private companies should make a register of their equipment/assets/specialised personnel.

  This could be useful in an emergency; especially an unusual emergency and this list should be made available to the local area emergency services. Government should create a central register.

  2.5  Private companies should develop disaster recovery plans for bio and nuclear terrorism.

  These should be drawn up with experts and should be rehearsed with the public sector.

  2.6  Private companies could take the lead in offering first aid training as an employee benefit.

  They should offer their employees a life skill, which, in the event of an extreme threat would give them a role to perform. This would not only help if the catastrophe overwhelmed the existing emergency services, but would assist community building by showing people how they can help others. It might even have the result in lowering the pressure on A and E facilities for minor problems.

3.  How the Government could assist the private sector

  3.1  Provision of special communications for key private sector personnel

  This is already happening as a result of FSA Initiatives whereby key companies are being assisted by the FSA allocating them special lines to maintain communications with the FSA in event of disaster. This approach needs to be widened to other key sectors if it has not already been done.

  3.2  Keep companies as fully informed as possible

  Companies and individuals are more resilient if they are given timely information about terrorist threats and if the consequences are publicly debated. There are obviously many security issues but a well-warned population, is one which is much more likely to be well rehearsed and to be able to react effectively in a crisis.

  3.3  Good Samaritans Act

  In Canada there is a law which protects those who go to the help of someone who has had an accident from negligence claims by the victim of their family. Parliament should consider something of the same here to support the first aid initiative and to kill the urban myth that if a person goes to another's assistance at an accident they lay themselves open to prosecution.

  3.4  Insurer of last resort

  The Treasury is clearly reluctant to get further involved in acting as the insurer of last resort. The commercial insurance market sees that accumulated losses from terrorist attacks could be so large as to destroy them and so are unwilling to accept such an exposure. Without insurance many aspects of investment cannot proceed. Rather than continually trying to finesse each situation where the insurers withdraw terrorist cover the Treasury should take a positive position and accept that it will stand as insurer of last resort for all terrorist cover. Payment for such cover would be made by the insured's to Pool Re or to Troika or any other vehicle that Treasury chooses.

  Since Pool Re was established in 1993 to insure property loss or damage it has built up its reserves from premiums received, despite paying out for several substantial losses, so that now it has reserves in excess of £1 billion. The Treasury has received a payment from Pool Re of over £200 million for acting as insurer of last resort. Only if its reserves were wiped out by a terrorist attack would the Treasury be required to pay.

  3.5  Pool Re definitions and extension of cover

  Definitions matter in insurance because they help determine whether an event is covered or not. Uncertainty can generate huge legal costs and delays as the Courts decide the meanings of the definitions.

  The definition of "acts of terrorism" in the Reinsurance (Acts of Terrorism) Act 1993 that set up Pool Re is as follows:

    "acts of persons acting on behalf of, or connection with, any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty's Government in the United Kingdom or any other government de jure or de facto."

  Since 11 September the insurers do not accept such a narrow definition and their insurance cover for property deliberately excludes terrorist acts, and extends the definition of terrorism to include acts by a single individual, acts which put the public in fear, acts committed for religious or ideological reasons etc. These differences in cover remove certainty for the insured, as there are gaps in cover. The gaps mean that claims might not be met by either Pool Re or by the insurers.

  To further illustrate the way that definitions change over time, seven years after the 1993 Act, the Terrorism Act 2000 defines terrorism to mean, amongst other things:

    "the use or threat is designed to influence government or to intimidate the public or a section of the public and the use or threat is made for the purpose of advancing a political, religious or ideological cause."

  The actions which can be described as falling within the 2000 Act include:

    "serious violence against the person, serious damage to property, creates a serious risk to the health or safety of the public, is designed seriously to interfere with or seriously to disrupt an electronic system".

  Pool Re covers only property damage at present, but it is not surprising to find insurers taking their lead from the 2000 Act's definitions.

  To change the definition needs Parliamentary time. There has been a marked reluctance by Treasury to consider this option. In addition the cover for public liability for terrorism, the excess cover for Employers' liability and for motor in connection with terrorism are all gradually being withdrawn from the market as re-insurance contracts fall due. This means that railways could be in breach of their licence and that many companies would be bearing huge risks on their balance sheets, risks which if they occurred, would destroy the companies concerned. PFI contracts placed by public sector organisations may be at risk. Again this extension to other covers of the Pool Re remit would require Parliamentary time. It would be far better to be ahead of the situation than to try to pick up the pieces. There is an immediate economic benefit from getting such legislation passed in improving confidence within British industry.

  3.6  Riots Damages Act

  The Home Secretary has warned that if there is an attack on Iraq then there may be riots in some British Cities. The events in Oldham last year were classed by the Greater Manchester Police Authority as riots and, under the Riots Damages Act the Manchester Police are the insurer of last resort and are being asked to settle the claims, so the local ratepayers may eventually foot the bill. In Bradford the police described similar events not as riots but as disturbances. This allows them to avoid any claims for damages. So we have a situation where the definition of an event by the police will determine who pays the claims. With insurers withdrawing from terrorism cover it is quite possible that when there are such events in future neither the police nor the insurers will be liable to settle the claims.

  The responsibility for riots damages should be transferred from the Police to the Treasury.

  3.7  European solutions

  The Government is urged to consider looking to create an EU mutual so that in the event of an attack on any one of the EU countries the whole EU will bear the cost. It may be that the UK catastrophe contingency plan may well ignore the potential for support from the EU, on the basis that it is unlikely to be forthcoming. Much better inter-governmental co-operation gives rise to greater resilience.


  On 17 September 2001 Aviation insurers gave seven days' notice to cancel the coverage that was provided under all Aviation Liability policies by the Extended Coverage Endorsement AVN52C. Basically, this endorsement provided liability coverage arising from war risks and allied perils. Effective midnight GMT 24 September, Aviation insurers made available a revised clause—Extended Coverage Endorsement AVN52D—to airlines, and soon after various derivatives of this clause were made available to smaller operators and to service providers in/to the aviation industry.

  AVN52D provides war risks and allied perils coverage to airlines up to the full policy limit for passenger liability coverage, but restricts such cover in respect of third party liability to $50,000,000 in the aggregate. Hence there was immediate need for replacement third party liability cover for war risks and allied perils in excess of the aggregate limit of $50,000,000 applied to each policy. Troika was formed to provide this excess liability insurance effective 23:59 GMT 24 September 2001 up to the sum insured that each aircraft operator had previously carried.

  Initially, Aviation insurers were not prepared to provide war risks and allied perils coverage to service providers, so Troika provided "ground-up" coverage in this respect up to the sum insured that each service provider had previously carried. Aviation insurers did eventually agree to provide $50,000,000 in the aggregate to service providers (per clause AVN52F), so the Troika scheme was amended in November to an excess basis for such entities. This did not apply to providers of security services, however, and to this day the Troika scheme remains primary for this small group of insureds.

  Troika provides coverage to Type A and Type B Air Operator Licence holders per the UK CAA register for their worldwide aviation activities. As for service providers, it only covers losses arising from their activities in the UK.

  The scheme has been extended several times. Currently it is due to expire 31 May 2002, when Her Majesty's Treasury hopes that alternative capacity will have been created to provide the coverage. There are no signs that the conventional Aviation insurance market will again provide the cover in excess of $50,000,000 in the aggregate. But there are current sources where it can be bought, eg an AIG/GE Frankona-led scheme, and a Berkshire Hathaway facility. Allianz are also looking to provide some capacity. These, though, are unattractive to airlines and service providers, so other solutions are being explored.

  The International Civil Aviation Organisation is trying to create a worldwide scheme modelled upon Troika. Similarly, the Association of European Airlines are investigating the creation of a, largely, European scheme, and the Air Transport association in USA are doing something similar in association with the FAA. The latter, of course, will not be available directly to non-USA operators and service providers.

  It is hoped that the successful formation of the ICAO scheme or a pan-European alternative will enable Troika, and other EC Government-supported indemnities, to lapse at the end of May 2002.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 24 July 2002