The introduction of the Counter-Terrorism and Border Security Bill to the UK’s House of Commons on 6 June will, if the bill is passed without amendment, close a gap that has existed in terrorism cover since Pool Re was established in 1993 – good news for businesses and their supply chain.
This article was originally published on Commercial Risk here.
Currently, insurers are able to provide terrorism cover within a commercial policy and the government-backed reinsurer, Pool Re, provides reinsurance against terrorism-related property damage and business interruption. However, the Reinsurance (Acts of Terrorism) Act 1993 restricts the cover by allowing payment for business interruption only when it is consequent on physical damage that has occurred to commercial property.
Businesses rarely operate in isolation. They are part of a supply chain, with multiple stakeholders up and down the chain. If a business is affected by a peril, be it cyber, fire or terrorism, the rest of the supply chain can be vulnerable particularly where contingent business interruption is not available.
The bill proposes amendments to the Reinsurance (Acts of Terrorism) Act, which would remove the requirement for property damage.
The changing nature of recent terrorist attacks, such as those in London and Manchester, which resulted in little physical damage to commercial property, has highlighted the existing gap in cover and the economic exposure to businesses and those in their supply chain.
Large numbers of businesses may be caught in police cordons while the terrorist event is contained and any necessary investigations are undertaken. This may prevent access to commercial premises – manufacturing may have to cease, or customers cannot access a restaurant or bar. The period of disruption cannot be controlled by the business, with SMEs particularly vulnerable to even a short period of uninsured business interruption.
Without the protection of terrorism cover for business interruption, or the ability to pursue a third party for the losses, some businesses may struggle to recover from the impact.
The Counter-Terrorism and Border Security Bill, if passed, will address this gap in cover. The amendments will increase the economic resilience of businesses from the financial impact of a terrorist event. The amendments to section 2 of the Reinsurance (Acts of Terrorism) Act 1993 mean that insurers will be able to offer contingent business interruption cover, with Pool Re able to reinsure against:
- Loss of or damage to property in Great Britain resulting from or consequential on acts of terrorism
- Any loss which is consequential on loss or damage to the property referred to
- Any loss resulting from business interruption to business carried on in Great Britain that results from or is consequential upon acts of terrorism.
This will enable businesses to protect themselves against any business interruption caused by a terrorist event, whether or not there is physical damage to the commercial property.
The bill will be of interest to risk managers given the potential cost to businesses as both customer and supplier in the event of a terrorist attack in the future. While it is not clear when or in what form the bill will be enacted given the early stage it is at, the passing of the bill will provide a level of reassurance that some or all of the risk associated with business interruption and more specifically contingent business interruption can be passed onto insurers and Pool Re, irrespective of whether there was any physical damage.