Ben Searing, Associate Director
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In the early 1990s, a series of terrorist incidents related to the situation in Northern Ireland caused insurers and reinsurers to consider ceasing to provide terrorism cover for commercial properties. This was due to the considerable potential cost of losses and the lack of any reliable method of estimating future losses, due to the unique nature of terrorism risk.
As well as leaving areas of business unprotected, a withdrawal of terrorism insurance could potentially have had serious consequences for the UK economy. It became necessary, therefore, to devise a new mechanism for providing this type of cover, without leaving insurers or reinsurers vulnerable to substantial losses.
As a result, Pool Reinsurance Company Ltd, also known as Pool Re, was set up in 1993 by the government. They act as a mutual reinsurer, and the vast majority of members offer commercial property insurance in the UK. Membership of the scheme offers a guarantee which ensures they can provide cover for losses resulting from acts of terrorism regardless of the scale of the claims.
More recently in July 2002, after the 9/11 terrorist attacks in the U.S., an agreement was reached to widen cover provided by amending other features of the scheme in a way that responded to changing needs of the market. In particular, Pool RE’s cover was extended to an “all risks” basis, and was no longer restricted to fire or explosion and exclusions relating to chemical, biological, radiological or nuclear (CBRN) attack were removed. In April 2018, cover was extended to include material damage and business interruption to commercial properties as a result of Cyber terrorism.
When considering Terrorism exposure for Real Estate assets, Lloyd's of London has been able to keep up with the Pool Re. offering, albeit with subtle differences. The latest changes to the Pool Re. offering, namely the Cyber and CBRN cover, are classified as additional policies for Lloyd’s placements.
In most leases and lending agreements, there will be a stipulation that the insurance cover includes Terrorism. European Investors engage with Brokers, and Terrorism cover is purchased through Lloyd's of London comfortable in the knowledge that this cover protects their assets and is in line with their lender requirements.
However, the Lloyd's Terrorism coverage specifically excludes CBRN & Cyber risks. The likelihood is that, in the 21st century, the frequency of more sophisticated terrorist attacks coming from a CBRN and/or Cyber risk will increase, and in turn, the exposure to Real Estate investors is ever greater.
In the last year, CBRN and Cyber coverages have become widely available and can be incorporated within Terrorism policies as an extension; however, this does all come at a cost. Naturally, as the market matures and more Insurers start to offer these covers we should see these costs reduce, losses permitting!
As well as in the UK, other European countries benefit from a government-backed scheme. Below is a table showing a selection of the most targeted territories by investors where such cover is and isn’t available and whether CBRN/Cyber risks can be included in such cover. Of course, Lloyd's of London are able to offer this coverage for all territories.
For peace of mind, Investors and Lenders should look to engage with their Insurance providers to understand the level of cover they currently have in place and, where required, look to request details of any shortfalls in their coverages in order that they know where these may occur. Also, for future transactions, potentially look to expand on the ‘Terrorism’ requirements within any Facility Agreement to ‘Terrorism inc. CBRN and Cyber’.