Yesterday's announcement by Michael Heseltine, President of the Board of Trade, follows heavy lobbying from the insurance industry which had been refusing to renew cover against terrorism - leaving major companies facing the threat of being driven out of business by IRA bombs.
Insurers will continue providing cover but the Government will bear all costs beyond a certain level. The precise cap will be determined by the amount of premiums charged for terrorist cover, but it seems likely to be about pounds 400m- pounds 500m.
The arrangement, if it had been in place during this year's IRA attacks on mainland cities, would have cost the taxpayer hundreds of millions of pounds.
The bomb which damaged the Baltic Exchange and the headquarters of Commercial Union in the City of London in April, has cost the insurance industry about pounds 750m. This is much more than all previous annual payouts and compares with pounds 657m the Government has paid out in Northern Ireland over the past 24 years.
The insurers, and the reinsurers who provide them with cover, say it is impossible to set premiums appropriate to the incalculable risk of bombings, and have decided to exclude terrorism cover.
With the Government agreeing to step in as 'reinsurer of last resort', insurers will allow customers to buy terrorism insurance. All premiums will be placed in a mutually-run pool, which, with investment returns, will be used to meet claims. Insurers will not have to meet claims beyond 110 per cent of the amount of premiums received.
The scheme was widely welcomed by the insurance industry, the Confederation of British Industry and property owners. Liz Taylor, chairman of the Association of Insurance and Risk Managers in Industry and Commerce, described the deal as brilliant.
The Association of British Insurers devised the scheme after calling on the Government to duplicate its Northern Ireland compensation scheme.
Companies working from premises in major inner city areas will have to pay higher premiums than those in lower risk locations. That disappointed the Corporation of London, which owns pounds 5bn of property in central London.
Michael Cassidy, chairman of the City Corporation's policy committee, said the scheme would double its premiums. 'The costs should be borne more broadly across all commercial property. We are a national asset in the City, we contribute greatly to the national economy - and this is a national fight against terrorism.'
Ms Taylor also expressed concern that companies might be forced to move out of London, which is already one of the world's most expensive locations.
Mr Heseltine said the government objective was to limit the duration of its involvement and keep costs to a minimum. The Government was well able to meet any obligations.