Politicians will tell you that everything changed on 11 September 2001. But then again, so will insurance companies. For the first time, hedging a bet against a major catastrophe, in the form of a terrorist attack, does not seem like a good idea. Unsurprisingly, insurance companies are still reluctant to take on too much risk of their own.
“Fifteen years ago, you would have been asking for up to 16 insurers to offer terms for some of these risks. Now we are down to about eight, and a number of those aren’t always interested in quoting,” says John Cowell, a consultant in the health and benefits practice at Mercer.
Insurance companies admit that it is a problem. “After 9/11, insurance companies have said that we are not prepared to take on all that risk in the event of something catastrophic happening, so the market practice is to limit the total pay out to something like £100m (e146.4m), though it varies between different insurers,” says Simon Gadd, director of group risk at Legal & General.
With the usual coverage far less than £100m, pension funds have taken to splitting their risk between different insurance companies. Each insurance company, for example, may take on an agreed percentage of each benefit, such as part of the lump sum life assurance and some of the spouses’ pension. Still, it is not an ideal situation, with each insurer charging different prices, and a lack of consistency across the board.
Although there has been a marked interested in catastrophe cover in the last few years, pension funds are frustrated at the cost. For companies based in capital cities, or busy urban areas, costs are obviously increased, compared to those that have their offices spread out. Sometimes, two different companies can share the same office space, and an insurer, having given coverage to one, will have to up the price significantly for the other. But consultants say that price should not from looking at their options.
“Catastrophe coverage is an issue that few companies have actually addressed. This is an exposure of such magnitude – for instance, we know that some companies have £1.5bn in exposure,” explains Andrew Davis, an accident and health associate at JLT Risk Solutions. He points out that such an exposure should be declared on the balance sheet, and is an exposure that the pension fund has to deal with as well. “There is an issue of trustee liability. Under the articles of association, they have to seek the best coverage possible. If they haven’t been to the market to look, then they aren’t doing their job properly and they could be sued.”
Many pension funds say they simply cannot afford it, or that the odds are low. Others, like ABP, point out that if all its members were to die at the same time, it would probably end up meaning the pension fund made a profit.
For Davis, such remarks irk. “As a company, you wouldn’t be diligent unless you looked at how this affected your bottom line and your liabilities,” he insists.