Figures from the recently released 2003 US State Department annual review of global terrorism make worrying reading for employers, and will affect the way insurers
will deal with and admit claims
for employment related employee benefits.
From the report, although the number of attacks has only increased slightly over 2002 and is significantly down on 2001, there has been a build up of indiscriminate attacks on
‘soft’ targets, such as hotels, places of worship and commercial districts, which are intended to produce mass casualties.
The consequences are a much higher level of casualties. The top three targets by regions in 2003 were Middle East, Asia and western Europe, with 30% directed against businesses, the predominant method of attack being bombing.
Against this background, life insurers and other providers of benefits for employees, such as life insurance, disability and medical cover, have begun to revise their terms for war and terrorism by limiting the amount they are prepared to pay in the event of a calamity.
The revised terms vary according
to the contract type and country, but essentially fall into three main exclusions.
1. War – where an employee is defined as passive or active participants in war:
q Active participation – where the employee has actively participated in the event which caused their death or disability. Most employers would expect this to be excluded from insurance and so it is of less concern;
q Passive participation – of more concern, this may restrict or exclude any claim even though the employee is the unwilling victim of war. Out of 152 insurers we surveyed internationally, 60 would still not cover the benefits insured through this exclusion.
2. Terrorism – defined as passive or active participants in terrorism:
q Active participation – as in the war exclusion above, where an employee dies or has a claim through an act of terror, it will not usually be admitted for a claim against the life insurance disability, accident or medical policies provided through the employer on his behalf. This applies in the majority of countries we surveyed;
q Passive participation – if the employee is the unwilling passive victim of terrorism in the same survey we found that 43 out of 152 insurers would still not cover the benefits insured.
3. Single event limit – a new and more far reaching exclusion:
q Typical in the UK, but now found elsewhere, this limits the insurer’s exposure even in the event of natural or man made disasters, through
the imposition of an overall limit
to claims. In the UK, three out of
four group life providers we surveyed have single limits ranging from
£50m (e73.4m) to £100m, regardless of the number of employees that are covered.
If the insurer is not prepared to meet these liabilities through the insurance bought by employers on behalf of their employees, this presents a quandary for employers or trustees of pension funds who are faced with a significant demand from claimants at a time when the business itself may be traumatised.
At risk is the lump sum value of life insurance, the capitalised value of spouse’s pensions, the capital value of disability claims plus medical costs.
To give an example, for a 35 year-old male employee earning E30,000 annually, the benefits provided by an employer might look as shown in table 1.
These are the amounts that would become payable in this example in the event of death or disability of this employee. If you extrapolate this for 500 employees, the figures would be as shown in table 2.
Fortunately, most employees are sufficiently dispersed or in areas where there is a low risk of a terrorist event. Some of the more obvious areas of immediate concern affected by these exclusions include:
q Key financial and governmental capitals of the world, particularly those in Asia and western Europe and the Middle East;
q Countries with increasing risk factors due to changes in political or social climates, such as Indonesia, Saudi Arabia and Pakistan, as well as those who are currently part of the coalition forces in Iraq;
q Locations with large office structures and high concentrations of employees;
q Financial services companies with heavy concentrations in the major financial capitals and with relatively high benefits;
q Countries in, or bordering, war zones: ie, Iraq, Israel, Syria etc continue to offer no standard coverage for war and terrorist risk;
q Employers with large numbers of employees regularly flying or working aboard ships.
Identifying and understanding the risk is the first step towards mitigating or removing it. All of the previously mentioned findings and possible trends give rise to one major conclusion – that there is an urgent need for companies to take a much more active approach in managing their global employee benefits programmes, and in turn take a more detailed look at each international location where employee benefit plans are provided.
Peter Eyre is a partner with Watson Wyatt