Government to seek bomb insurance costs: Further pressure for higher premiums

The Government made it clear yesterday that it intends to recover the cost of meeting insurance claims arising from acts of terrorism such as the bombing two weeks ago of Bishopsgate in the City of London.

The Government's determination to cover its costs could put additional upwards pressure on the premiums charged for terrorism insurance. Howard Davies, director-general of the Confederation of British Industry, described suggestions that insurance rates would have to rise further as 'very disturbing'.

Mr Davies said: 'The new rates are commonly held to be high and, in some cases, penal, especially at this stage of the economic cycle. Companies would take it amiss if the problems of managing the (public sector borrowing requirement) led the Government to insist upon a rapid build up of . . . resources and a swingeing increase in premium rates.'

Michael Heseltine, President of the Board of Trade, said it is inevitable terrorism premiums will reflect the level of perceived risk. But he added: 'The costs should remain only a small proportion of total business costs. For many businesses the cost represents much less a threat than the possible lack of insurance cover.'

The Government was publishing the Reinsurance (Acts of Terrorism) Bill, which will give life to the deal done with the insurance industry last December. The centrepiece of the new arrangements is Pool Reinsurance, a specially-created mutual company that will be paid all the terrorist insurance premiums collected by participating insurers. This pool of money plus investment income will be put towards meeting any claims.

Should claims exceed the pool - as seems almost certain this year after the Bishopsgate bomb - insurers will bear costs equal to 10 per cent of the premiums collected and the Government will meet all further claims, acting as 'reinsurer of last resort'.

Claims from domestic customers, and small commercial claims up to about pounds 500,000, will remain a liability of the insurers.

The Government intends eventually to charge the Pool a premium for providing reinsurance. It said premiums will be set 'with the aim of avoiding any net cost to Government over a period of years'.