Terrorist attack brings fear of ruin to the City: Without government help arepeat of the Baltic Exchange blast will break the insurance companies. Paul Durman reports

(First Edition)

THE GOVERNMENT'S dispute with the insurance industry over who picks up the bill for terrorism is a direct result of the IRA bomb which destroyed the Baltic Exchange in the City. Including re-building work and business interruption claims, the blast will cost the insurers an estimated pounds 750m.

Until this year, insurance against terrorist attack was regarded as a minor and relatively trivial part of the cover which insurers provide. Yet the cost of this one incident is a third of the pounds 2bn or so of premiums which industry pays each year for protection against all other forms of risk.

Faced with this scale of potential loss, the insurers - already weakened by years of heavy losses - say they cannot afford to offer substantial amounts of cover against terrorist attacks. Together with the Confederation of British Industry, the insurers are calling on the Government to help, perhaps by agreeing to bear all claims above a certain level.

Without insurance, major companies will be left at the mercy of the IRA. The cost of replacing a multi-million pound factory or office block could threaten to break the largest companies.

John Parry, chairman of the British Property Federation and managing director of the property company Hammerson, said: 'It could drive even the biggest businesses under. One does not want to make this a win for terrorism, none of us do. But the right and proper scheme is an agreement between government and industry, with the Government acting as reinsurer of last resort.'

The bulk of the costs of the Baltic Exchange bomb in April have fallen on the reinsurance companies, such as Munich Re, who insure the insurers. For example, although Commercial Union's London headquarters was destroyed, its exposure was capped at a relatively modest pounds 15m.

The reinsurers feel they are unable to quantify the risk of insuring against terrorist attack and are refusing to renew the cover they offer to insurance companies beyond the end of this month. Without this protection, the insurers say they will be forced to limit cover against terrorist attack to a few million pounds.

In the early months of next year, insurers will continue to be exposed to bomb attacks on their corporate customers even though they are unable to renew their own reinsurance cover. Mr Parry said this raised the question of whether insurers would be sufficiently solvent to pay any claims.

After several months of lobbying Cabinet ministers, the Association of British Insurers last week wrote to John Major to warn the Prime Minister of the grave threat which terrorism poses to the British economy.

Michael Heseltine, the President of the Board of Trade, would like the insurers to find a commercial solution. The compensation scheme which the Government provides in Northern Ireland would be hugely more expensive on the mainland, particularly in London.