View from City Road: Bomb opens gaps in re-insurance

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Whatever else may be learned from the Bishopsgate bomb, one thing is clear: the insurance industry pulled off a cracking deal last December when it offloaded much of the financial burden of terrorism on to the taxpayer.

John Chester, an insurance analyst at SG Warburg, said he and his colleagues had scarcely bothered talking about Saturday's bomb because it was really a non-issue. However dramatic the pictures, the IRA's assault will cost the leading insurers no more than pounds 5m- pounds 10m apiece. This is on a par with a large industrial fire. Moreover, under the December agreement on pooled insurance for terrorist attacks, the cost of all further large bombs this year will fall almost entirely upon the Government. The pool of terrorism premiums will be drained by a single bomb.

The arithmetic that the Association of British Insurers used to convince the Department of Trade and Industry seems badly flawed. It was suggested that the premium pool would amount to pounds 400m, leaving the Government exposed only to claims totalling more than pounds 440m or so. In the event, Pool Re, the specially created re-insurer, seems likely to collect premiums nearer to pounds 200m, as some businesses display a predictable optimism that 'it won't happen to us'. The result is a corresponding fall in the threshold of the Government's support.

The ABI argued its case claiming that last April's bombing of the Baltic Exchange would cost pounds 750m, although it was suspiciously unable to provide a breakdown of this huge sum. The true figure turned out to be a little over pounds 300m. In these circumstances, it ill becomes the ABI to rubbish as 'wildly inaccurate' the pounds 1bn estimate of the cost of the Bishopsgate bomb made by Nicholas Balcombe, the loss assessor. At least Mr Balcombe was making a seat-of-the- pants assessment, not mulling over a misleading figure for nine months.

The ABI may face a harder task establishing its credibility next time. Insurers must hope the House of Commons does not increase their terrorism exposure by tampering with the forthcoming legislation for Pool Re.

The idea behind Pool Re remains a good one. But its premiums will have to rise, which will have the effect of reducing the Government's future liability. In the final analysis, the IRA is attacking British society. Taxpayers must bear their share of the costs.