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
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
Three key issues which could affect resilience
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
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
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
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
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
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
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
3. How the Government could assist the private
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
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
3.5 Pool Re definitions and extension
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
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 clauseExtended
Coverage Endorsement AVN52Dto 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
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.