Damage not enough for payout

AFTER THE BOMB: INSURANCE

TOM STEVENSON

City Editor

The Government will not be footing any of the estimated pounds 100m cost of rebuilding bomb-damaged offices in the South Quay area of Docklands, despite its decision three years ago to act as insurer of last resort after terrorist attacks.

Under an underwriting arrangement set up after the Baltic Exchange attack in 1993, the Government stepped in as a guarantor of large terrorism-related insurance claims. However, it only needs to pay up if a pool of premiums collected by insurance companies is exhausted.

During the 17-month IRA ceasefire it is understood that the pool built up to several hundred million pounds, and a spokesman for the Association of British Insurers said the fund, together with accrued investment interest, would cover anything but a sustained bombing campaign.

Since the 1993 bomb that destroyed the Baltic Exchange in St Mary Axe in the City of London, all terrorist insurance has been handled by a pooled fund, into which insurance companies place premiums specifically related to anti-terrorist cover. The fund, called Pool Re, was created in response to insurers withdrawing cover due to the potentially open-ended nature of terrorist damage.

As part of the Pool Re arrangement, the Government promised to act as the insurer of last resort, effectively underwriting calls in excess of 110 per cent of total premiums paid. After the Bishopsgate attack in 1994 it was feared the Government's promise might lead to taxpayers having to stump up more than pounds 400m to top up the insurance pool, although the damage proved less costly than at first feared.

The ABI spokesman said Pool Re based the level of premiums on the assumption that there would be one serious terrorist disaster each year. With the Docklands bomb thought to have caused less than half as much damage as the Baltic Exchange attack, and less than a quarter the pounds 650m cost of Bishopsgate, its resources will not be stretched unless there are more attacks this year.

The Docklands bomb attack last Friday will, however, lead to a jump in businesses' anti- terrorism insurance costs this year, as the damage at South Quay has triggered full payment of premiums, which the industry had conditionally discounted during the ceasefire.

As a reflection of the lower chance of terrorist attacks, insurance companies cut premiums following the August 1994 ceasefire by 20 per cent, followed by a further conditional cut that allowed businesses to pay 60 per cent of their insurance bill up front, with the obligation to pay the remaining 40 per cent only in the event of a serous disaster.

The industry defined that as one costing in excess of pounds 75m, which compares with estimates of Friday's damage of between pounds 75m and pounds 150m.