Commentary: Government must help absorb blasts

Unless somebody discovers a way to divert the high-altitude jet stream that controls the path of weather systems, the occasional hurricane across the British Isles will remain an Act of God. It is hard for insurers to set premiums for such rare and expensive events, but it is their job, not the Government's, and there is no case for them to withdraw storm cover.

When it comes to terrorism, the Government seems to think the same way. So it has been leaning on the insurance industry to defray the costs of bomb attacks rather than slash cover as insurance contracts fall due for renewal.

The analogy with weather disasters does not stand up to close scrutiny. A storm is out of anybody's control. The success or failure of a terrorist campaign depends at least in part on the Government's own competence in combating it at several levels - political, military, civil-policing and intelligence-gathering.

These are expensive activities, funded by the taxpayer. It takes no great leap of logic to accept the idea of a taxpayer's contribution to the costs where terrorists do get through to their targets, especially with the precedent in Northern Ireland.

On a practical level, there is a cut-off point where it is no longer in the insurance industry's interest to offer full cover, as it has until now. This is when the level of risk and therefore the premiums become impossible to measure.

There are long weather records to judge the frequency of hurricanes, but no statistical benchmark for an upsurge in terrorism. Yet three equivalents of the Baltic Exchange bomb would cost more than the entire pounds 2bn annual premium income of the insurance companies from industry and commerce. In a free market, it is wrong to force insurers to act against their commercial interests.

As the insurance lobby has said, plans to withdraw all but a small amount of cover against terrorist attack put industry and commerce at risk: an outrage on the scale of the Baltic Exchange bomb could put a big industrial company out of business if it had to bear the whole cost of rebuilding, together with loss of trade.

Furthermore, the insurance industry's portion of the cost is only a part of the total. Most large companies use self-insurance to some degree, so asking the insurance industry to restore cover only tackles one aspect of the problem. The Government must become involved, with money, guarantees or both. It should cap the risk borne by insurers and the self-insured, after they have paid the equivalent of an excess. It will prove immensely complicated to negotiate, and the initial proposals put up by the industry are not yet right. But Michael Heseltine, the President of the Board of Trade, should concede the principle now.