A Looming Threat

This publication is provided for informational purposes only. Implementation of a risk management program requires the input of a number of professional consultants including financial, corporate governance, legal and risk management. Marsh Canada Limited makes no representation or guarantee that insurance can be placed on terms acceptable to you and assumes no responsibility for any loss or damage sustained in reliance on this publication.

The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. You should consult your insurance, legal experts and other advisors regarding specific risk issues.

Following the Sept. 11, 2001 attacks in New York and Washington, D.C., terrorism coverage became a standard exclusion in property insurance policies. To fill the void, standalone terrorism policies were developed in 2002 to provide coverage for property damage as well as business interruption due to a terrorist event.

In Canada, terrorist attacks have been rare, primarily directed against business groups in Quebec during 1960s and 1970s by the Front de Liberation du Quebec (FLQ) and later by minor attacks on Anglophone businesses in 2000 by the Brigade d’Autodfense du Franais (BAF). Apart from that, no major terrorist act has taken place on Canadian soil.

And yet, the Canadian Security Intelligence Service (CSIS) and RCMP have recently thwarted plots to commit violent acts against Canadian targets. For example, they broke up the Toronto 17 dormant cell in June 2006, and foiled a plan to blow up a gas tanker in downtown Montreal.

Although these alleged plans were thwarted, they point to the fact that the risk does exist in Canada. In fact, the commercial insurance industry continues to exclude terrorism from its insurance policies in Canada.

Meanwhile, efforts have been made to create a framework for helping businesses address the financial consequences of the exposure. In 2003, a group of insurance specialists approached the Canadian government to seek interest in establishing a government-backed insurance scheme to respond to terrorism losses, much like the U.S. had established the Terrorism Risk Insurance Act (TRIA) in 2002.

The government’s response at the time was that Canadian businesses and the public were not demanding such an involvement, nor was the Canadian economy suffering from the lack of this type of scheme. The only exceptions included the nuclear protection fund for power generators and the aviation protection fund for airlines and airport operating companies. Subsequently, in other commercial sectors, there has been a growing private insurance market participation in responding to this peril.

UNDERWRITERS AND MARKET CAPACITY

Capacity in the standalone insurance market continues to expand. There are three licensed carriers in Canada: American Home Assurance Company (AIG), Arch Insurance and Lloyds. AIG recently increased their line from Cdn$150 million to Cdn$250 million. The licensed carriers provide approximately Cdn$700 million in capacity. Also, five unlicensed insurers in the Canadian market can provide an additional Cdn$450 million in capacity. Finally, Berkshire Hathaway (unlicensed) can be sourced on limits of up to Cdn$1 billion. Note the capacity figures for all insurers cited here are as of Aug. 9, 2007. Available capacity may vary depending on the risk and location.

Similar to property policies, one-year terms for terrorism coverage are the norm, although coverage can be extended for up to three years under certain circumstances.

WHO BUYS TERRORISM INSURANCE?

Real estate companies, financial institutions with real estate investment portfolios and the hospitality sector continue to be the largest industry segment buying terrorism coverage in Canada. These sectors collectively purchase more than 50% of the policies placed by Marsh Canada. The power and utility industries are the second-largest purchasers, at 16%, with the balance of the policies purchased by the transportation, manufacturing and telecommunications sectors.

By comparison, the U.S. experience indicates financial institutions, real estate firms, utilities, educational institutions and health care facilities had the highest terrorism take-up rates, each exceeding 75%.

Key reasons for buying coverage in Canada are adherence to prudent corporate governance practices and the perceived susceptibility to terrorist attacks. Terrorism insurance has frequently been a lending requirement for U.S. lenders as well as foreign banks in Canada.

NEW DEVELOPMENTS

The market for terrorism insurance is constantly evolving. New developments and shifts include:

* a drop in terrorism premiums of more than 50% since standalone terrorism policies were introduced. This “more affordable” scenario has prompted many clients to purchase cover for the first time;

* a new willingness by underwriters to expand the scope of cover to include sabotage. Clients with exposures to emerging economies can also purchase coverage for political violence such as strikes, riots, civil commotion, war, etc.;

* inclusions in property cover that offer coverage for professional fees and increased replacement costs due to changes in bylaws. Business interruption enhancements include sub-limits for up to 30 days of coverage for impaired access following a terrorist event within 1,000 feet of your location. In addition, there is coverage for a closure as the result of an order by a civil or military authority in the wake of a terrorist attack;

* a new endorsement that Catlin syndicate of Lloyds of London has started to provide up to Cdn$40 million for nuclear, biological, chemical and radiological terrorism. Coverage is underwritten on the basis of a specific location and not on an overall portfolio. Typically these are currently exclusions in standalone markets; and

* up to Cdn$75 million in standalone terrorism liability insurance that can be sourced from Lloyd’s of London. Coverage applies for both employee and third-party liability.

RE-ASSESS THE RISK

Standalone terrorism insurance has been available in Canada since early 2002. Many still perceive the Canadian environment to be benign in connection with terrorism threats. But recent thwarted attacks, as well as information from security specialists that terrorists are increasingly trying to inflict indirect losses to their primary targets, suggest prudence in evaluating this peril.

Risk managers and board members concerned with the governance aspect of their business are increasingly assessing their exposure and evaluating the need to transfer part of the totality of their exposure to insurers.