Swiss Re Report on Terrorism Insurance Endorses Public/Private Solution

February 22, 2002

Swiss Re has released a study entitled “Terrorism — dealing with the new spectre,” which concludes that the most promising approach to the problem of terrorism insurance is a “public/private partnership.”

“The report addresses the challenges insurers face after September 11 and specifically considers if terrorism risks are insurable,” said Swiss Re.” It presents possible solutions that insurers and reinsurers could offer to clients and also considers the role of government.”

Swiss Re’s study directly confronts the impact of the events of Sept. 11, noting that prior to the attacks “the assumed maximum loss potentials attached to terrorist acts were of a controllable size and were comparable to property losses resulting from fire or explosion. On this basis, terrorism was not explicitly excluded from property policies. However, the magnitude of the loss in the United States revealed a new scope and extent of terrorist threat and has forced insurers to reconsider these assumptions and the insurability of terrorism risks all together.”

Terrorism risks increasingly “meet fewer of the important criteria of insurability, particularly as it is impossible to accurately assess the probability and severity of terrorist attacks,” said the report, concluding that coverage was now only available “on a very limited basis.”

Swiss Re recommended that government and insurers work together to develop solutions, and proposed three elements that “efficiently combine state and private insurance in the short to medium term,” as follows: “First, mandatory direct insurance, under which all property risks are automatically covered against terrorism risks. Secondly a levy is placed on current property premiums, which could be a fixed percentage or downscaled according to exposure. In the US such a levy would typically need to be around 3-5% of the property premium.”

The third proposal would require “a greater sharing of the loss burden, by further aligning the interests of all parties to these risks, i.e. insureds, insurers, reinsurers and government. Insured parties should carry a significant deductible, of around 5%-10% of insured values. All insured losses would be pooled and the pool reinsured beyond a given deductible by reinsurers, capital markets and government.”

The announcement concluded that such a “public/private partnership offers the most promising approach as all stakeholders bear a portion of the risk relative to their financial capacity. With large shares of terrorism risks pooled and government assuming the role of insurer of last resort.”

The full report may be obtained from the company’s Web site – http://www.swissre.com.

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