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Terrorism Insurance
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, 24 2011

On September 15th, the 7th Congress on Victims of Terrorism will be held in Paris. Three hundred relatives of terror victims, as well as politicians and representatives of the security services, will try to find some new ways to counteract terrorists. Human suffering, however, is but one of the faces of terrorism the other being its huge financial cost. Insurance companies are combining into pools to provide compensation for damages from terrorist attacks, while for ten years France has been the world leader for this type of insurance.

France was the first country to set up a universal pool for damages from terrorist attacks on a large scale. Already back in November 2001, two months after the attacks on the World Trade Center, an insurance pool by the name of Gareat appeared, supported by unlimited government guarantees. Ayear later, in September 2002, a similar pool also appeared in Germany. TheGerman Extremus, like its French counterpart, is based on government guarantees, but is limited to 10billion euros, and nuclear, biological, and chemical risks do not fall within the scope of this pool. Anti-terrorism insurance is not compulsory in Germany, either, so for now only about thirty percent of German companies have this type of insurance.

Great Britain is on its way to creating a similar insurance pool. Whenit fell under a series of terrorist attacks in 1992, the initial result was not the desire to develop terrorism insurance, but rather the refusal of a majority of British insurers to include such risks in their contracts. Thissituation led to the need for the creation of Pool Re in 1993. Despite the fact that the pool was hailed as a means of insurance against terrorism, the use of its funds are quite limited mainly for the consequences of IRA terror bombings. Italso does not carry the same universal character as the French anti-terrorism insurancepool.

Only since January 2003has there been a great expansion in the activity of Pool Re, which now includes coverage against chemical, biological, and nuclear weapons. Unlike the French and German pools, however, the amount of coverage in English policies depends on the place of the attack. InFrance, the premiums for coverage against a chemical attack would be the same in Paris as they would be in a small village, but in England higher compensation and correspondingly higher premiums would fall on central London.

An unexpected situation occurred in America: prior to September 11th, 2001, most insurance contracts over there included or implied insurance against terrorism. WhenAmerican insurance companies suffered huge losses, however, they began to rid themselves of such items in their policies.

The insurers themselves admit that had new terrorist attacks in 2002occurred that reached the scale of the World Trade Center attack, then the economic consequences would have been extremely sad, since by that time traditional anti-terrorism insurance policies had ceased to be in force, and nothing new had been proposed.

This situation was corrected in late 2002, after the adoption of a special act of terrorism insurance in which responsibility is shared between the US government, insurance companies, and the insured. Nowthere is up to$100 billion dollars of insurance coverage in case of terrorist attacks in the United States.

Interview with FRANCOIS VILNE, vice-president of the GAREAT insurance pool

European Dialogue: The current French insurance system against terrorist risks is the most comprehensive in the world. Howexactly is this manifested?

FRANCOIS VILNE: Firstly, in France there is no predetermined threshold of coverage for damage caused by terrorist acts, because there are unlimited state guarantees. TheGareat special insurance pool has a first tranche of 400million euros, which is from the member companies of the pool. Thenext tranche of 1.6 billion euros is covered by French and foreign insurers. Ifthe damage is assessed at over two billion, then Gareat has the right to unlimited coverage by the French government through the Central Reassurance Treasury (Caisse Central de Reassurance).

Such an approach is extremely rare throughout the world, because in most cases there is a predetermined threshold of insurance compensation. Forexample, in 2002the United States adopted a special regulation for the insurance of terrorism risks with the Terrorism Risk Insurance Act (TRIA), which defines the role of the government, but outlines clear lines of government coverage for damages, which are not unlimited, as in France.

The second feature of the French insurance system is that everything under it falls into terrorist risks: international, national, and regional. Inthe United States, they also make a distinction between domestic and international terrorism, but only the later falls under the previously mentioned act, whereas insurance against domestic terrorism is not regulated by the act. Forexample, if today there was a terrorist attack similar to the 1995bombing in Oklahoma City that killed 630, it would not fall under TRIA, because it was not international terrorism, but domestic.

It should also be noted that under the French insurance system compensation can be made for all kinds of damages, from classical bombings on up to and including nuclear explosions if such, God forbid, were to happen, as well as chemical, biological, and radiological (dirty bomb) terrorist attacks. Thus, it takes into account all types of weapons of mass destruction.

In 2006, a new law was passed that replaced a two decades-old law. Thenew law is the third major difference of the French system. WhatI mean is, it is unusual for the insurance world, as it covers all damages on French territory, even if a terrorist attack were to occur in neighboring states. If, for example, a nuclear attack were to occur in Switzerland, then we would pay those in France who suffer from it. Thus, private and public property is insured, whatever the cause and location of the terroristact.

ED: Does this mean that it is mandatory for all French companies to be insured against terrorism?

FV: There is no requirement for such insurance, but insurers have a duty to include terrorism-related risk in their list of mandatory services. Thisis another difference seen in France, whereas in Germany and England businesses are free to sign up for such services, or not. AllFrench fire and damage insurance policies automatically include terrorist risks. Itis the responsibility of the insurance companies.

ED: The Gareat French insurance pool was created after the American terror attacks. Wasthere terrorism insurance in France before this?

FV: Of course, France had long been working towards the insurance of terrorism risks. Unfortunately, our country has faced a wave of terrorist attacks. Itmay surprise you, but the first law affecting the insurance of the risks of terrorism was adopted in 1943, even before (sic) the beginning Second World War! Justas in Spain, when after the civil war there a similar act was in general adopted before 1941.

The events of World War IIare not now classified as terrorism, but back then they were often referred to as such. Thesecond wave of terrorism that France faced was during the colonial wars, and a third round began in the 80s following the Algerian problems.

The first comprehensive law against terrorism appeared in France in 1986, and in it appeared the mandatory provision of insurance against terrorist risks. Thenew law adopted in 2006added special articles on weapons of mass destruction. Avery difficult issue was with regards to contaminated areas in the event of a nuclear attack, since it is unclear where exactly the insurer's responsibility ends. Thelaw states that insurance companies reimburse damages, for example, to homes or businesses, but it does not deal with the problems of contaminated soil, as here effective government programs are inplace.

ED: If every business policy includes coverage against terrorist attacks, what about individual victims who are not insured and, for example, suffer in an attack on the subway?

FV: In France, there are several levels of insurance. TheGareat pool appeared in order to coordinate and provide reinsurance coverage for risks with especially large damages. Gareat is not for insuring individuals, but required for insurance companies. According to French legislation, they need to sign up for it. Hereit is the same principle as with most insurance against terrorism: it is not the duty of the insured, but the insurance company. IfGareat deals with the consequences of major disasters, then the insurance companies themselves cover these smaller amounts.

For citizens there are also many options, from their own life and accident insurance policies to the special government anti-terrorism guarantee fund that was established in 1986after a series of terrorist attacks. Thisis dedicated to victims who do not have special insurance.

But the French system does not end there, because it is extremely complex. There is another insurance pool that applies to Corsica. Asyou know, there have always been terrorist attacks happening in Corsica, but on a small scale. Butbecause of this, many local residents experience difficulties in getting home owner's insurance. Tosolve these problems a Corsican pool was created. Thus, in France there are many structures involved at different levels for insurance against terrorist-relatedrisks.

ED: Have insurance premiums in France gone up greatly since all insurers are required to provide insurance against terrorism?

FV: Mandatory provision of such insurance has been a big advantage in France. Wecover almost 95% of all industrial risks associated with terrorism, and since it has such a broad scope the contributions of each policyholder have not increased very much. Inother countries where terrorism insurance is used selectively, the insured are on much less favorable terms. TheFrench pay the global average, even though their coverage automatically includes biological, nuclear, and chemical hazards.

The strength of the French system is the fact that terrorism risks are included in insurance, so even if there is no clarity as to the cause of an attack, this has no effect on coverage for damages. Either Gareat or the insurance company pays the business, or, if it is determined to be the fault of the business itself, then there is its own liability insurance. Ifthe cause is not found, which is usually the case with bombings such as happened in Toulouse, then these are the responsibility of the business's insurance company.

Photographs of the Congress on Victims of Terrorism

International e-newspaper
'European dialogue'

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