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Terrorism Insurance and the Governments Greed

It’s been over twenty years since the city of London was rocked by two huge bombs that had been planted by the IRA only months apart.

The first was a large truck  in April 1992 in St Mary’s Axe, the second was in 1993, also a truck at Bishopsgate. The second caused over £1 Billion of damage and almost bankrupted Lloyds of London, who ended up paying out hundreds of millions of pounds in Insurance Claims.

Thats Insurance

The result of these bombs was that in the after math of insurance settlements, terrorism cover was excluded from insurance policies and it became impossible for commercial property owners to insure their properties against terrorism. It was felt a third bomb was a real likelihood and another Billion pound payout would finish off not only Lloyds of London but other Insurers as well.

After months of negotiations, the government had no choice but to step in and create a company together with major Insurance Companies called Pool Re.

The Company would be run and contributed to by the Insurers and the Government agreed to loan unlimited amounts to cover any future losses over and above the premiums collected. This was in return for a commission of ten percent of the premiums collected.

Pool Re

Any loans given by the government would be repaid from future premiums, however the 10% credit paid to the government would be taken into account if this scenario ever arose.

Of course as we now know there wasn’t a third huge bomb and Pool Re’s reserves are currently estimated to be over £5.5 Billion.  During that time the company has paid out more than £600 Million, most of which was for the Tube and Bus bombings or 7 / 7 as it is known.

This setup has worked remarkably well. It has allowed large businesses and companies in and around the city of London to have peace of mind. More importantly it makes the city of London a financially safe place to do business.

Pool Re has gone from strength to strength and it now includes cover for chemical, nuclear and biological attacks.

Of course the government being the government couldn’t leave this alone for ever and several months ago, announced they were reviewing the arrangement. Last month they advised Pool Re, that the cost for the backing of the government was rising to 50%.

Pool Re have until the 21st November to decide. If they choose not to accept, then the government withdraws its support and the scheme closes.  This would be a complete disaster for businesses in London and on the face of it Pool Re have little choice but to accept.

If the business were wound up, the government would expect some of the reserves back and without the support of the government it is unlikely a new scheme would be forthcoming. Quite simply there would be no-one in a position to underwrite it.

In fact Pool Re has written to the various Insurers who are part of the pool advising them to accept the deal. If agreed the government will see a seven fold rise in return to the taxpayer. A good deal for the treasury no doubt, but premiums will have to increase to cover the rise.

Is it feasible to be able to raise premiums by the same amount as the increase in the governments cut?  Probably not. If this is the case, the amount of reserves held by Pool Re will reduce over  time and if terrorist attacks are as big a threat as we are being told, could this mean that the governments greed will cost them dearly in the years to come?

If you own commercial property do you have terrorism insurance cover ? do you understand what a terrorism policy covers? click here to find out more



Investing in Commercial Property

Why commercial property? Compared to residential property investments, commercial property offers some key advantages: Long-term secure cashflow — Commercial lets normally have long lease contracts, with periods of 10 years and more not being uncommon. In addition to this, commercial property tenants are less likely to default on payments and even if the tenant goes […] Continue reading →