Indemnification and consequences for underwriting

There are important reasons against combining terrorism risks and workers' compensation in terms of financing and indemnification.

Workers' compensation insurance has its origins in the industrialisation of the 19th century and its clear objective is to minimise and insure against the perils associated with the workplace, i.e. industrial accidents and diseases. In modern industrial countries a basic understanding has evolved that, as controllers of the means of production, employers are responsible for protecting employees against work-related risks.

This principle has led to the firm belief that claims from workers' compensation insurance must be directly linked to the working process. Even if the private economy may find itself a target of terrorist attacks, this has nothing to do with a risk inherent in the working process.

Not everything that happens at the workplace or during working hours can be classified as an occupational accident or disease. Including terrorism in workers' compensation insurance would result in a far broader spectrum of claims and would make the risks involved virtually incalculable. Insurers certainly have no intention of evading their responsibilities in this area.

At the same time, however, it is quite clear that the insurance industry can only provide sustainable and effective cover of risks over which it has some degree of control. This requirement is patently not met in the case of terrorist attacks, which can be carried out any time and anywhere and can cause immense losses. Acts of terror constitute a threat to public safety, the guarantor of which is the state. For this reason, therefore, it is the state that should bear the consequences that arise when this protection fails.

Some countries, for example the USA, the UK and Spain, have already acknowledged this fact and have seen fit to establish state funds to cover terrorist attacks. These funds are financed through taxes or a variety of other contributions.

As the events of 11 September 2001 mean that we are no longer able to rule out the possibility of major man-made attacks with devastating consequences, we should also bear in mind the following: the bigger the risk community, the easier it becomes to shoulder the burden of the economic consequences following a mega-attack.

Consequences for underwriting

Insurers and reinsurers will continue to strive towards their goal of removing terrorism from policies and reinsurance agreements. Alternative concepts of cover are therefore needed and are actively being sought. Some countries have already shown the way with viable options. For example, the USA offers the option of excluding "nondomestic" terrorism from reinsurance agreements and alternatively covering substantial portions of these risks via state guarantees.

However, in other countries workers' compensation law obliges insurers to provide cover, thus leaving reinsurers in the same situation. In such cases Munich Re has at least tried to limit the liability for terrorism by imposing event limits or sublimits.

It is in no small measure thanks to these limitations that the insurance industry and governments have entered into negotiations to exclude terrorism risks from workers' compensation insurance.