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                                                                                            number 33 // october 2004

                                       GAREAT is a consortium which covers all acts
interview                              of terrorism without imposing a deductible

Vice-President of GAREAT
(Gestion de l’Assurance et de
la Réassurance des Risques
Attentats) and President of
the Reinsurance Committee
of FFSA (Fédération Française
des Sociétés d’Assurance),
and also of the Re Club.

As a result of the terrorist attacks
of 11 September 2001 in New
York, the world insurance
industry suffered an unprecedented
upheaval. It was immediately
apparent that there were no
specific insurance solutions
 to adequately counter the risk
of small or large-scale acts of
                                            François Vilnet is Vice-President of GAREAT (Management on insurance
                                            and reinsurance of risks deriving from terrorist attacks). He is President
In the case of France, in order to          of the Reinsurance Committee of the French Federation of Insurance
mitigate the problem to some                Companies (FFSA), and also of the Re Club, a private reinsurance asso-
extent, one month after the attacks
                                            ciation. He studied engineering at the School for Industrial Physics and
steps were taken to set up the
Gareat Pool, which was modelled             Chemistry in Paris (EPCI) and he is also an economics graduate. In the
both on Spain’s Insurance                   1970s he worked as an engineer for the Air Liquide group. In 1980 he
Compensation Pool and on                    joined SCOR as a facultative underwriter and in 1984 he became the
Pool Re in the United Kingdom.
                                            head of this reinsurer for the French market.

This interview gives an overview                In 1992 he was appointed senior underwriter of Abeille Re and in
of its development, structure,              1995 he took up the position of Secretary General of AXA Re. In 1996
mission and future.
                                            he joined SAFR as Director of Planning and in 1999 he assumed
                                            responsibility for Partner Re’s planning and risk management. Since
                                            2003 he has been deputy head of properties and claims for Partner
                                            Re Global.
                  number 33 // october 2004

What circumstances brought about               Pool), Spain, and the CCR (Caisse               per risk and per event with a reasonable
the creation of a pool to insure against       Centrale de Réassurance), which existed         pricing policy (average of 12% of property
terrorism risks in the French market?          in France in the eighties. The GAREAT           premiums).
                                               pool was set up in December 2001,
The French pool for terrorism, GAREAT,         following an agreement between the              For insurers it enables them to apply a
was the first in the world to be set up        state, the two federations of insurers          limited retention limit on larger risks (with
with a state agreement following the           (FFSA and GEMA), the brokers, risk              a maximum per year), having full rein-
tragedy of the World Trade Centre.             managers and the main reinsurers of the         surance without limitation per risk or per
                                               French market.                                  event at a fixed price regardless of loss
The main reason for quickly setting up a                                                       experience. It is a safe scheme with joint
pool in France without the need for legal      The basis of this agreement was to set          liability for insurers, high quality reinsurers
changes, was that reinsurers had exclu-        up a pool for one year, mandatory partici-      selected on ratings, and a full state
ded cover against terrorism for major          pation of all French insurers, cession of all   warranty.
industrial risks. In addition to this, a law   French property risks in excess of EUR 6
in 1986 stipulated the obligation to offer     million (sum insured), unlimited cover by       For re-insurers it limits their responsibility
full cover against terrorism in all property   the state following a market annual total       (with a maximum per year), without any
policies.                                      of EUR 1.5 billion and a reinsurance pri-       accumulation for this type of cover or with
                                               cing policy of around 12% of property           other countries.
"The main difference between                   premiums.
GAREAT and previous terrorism                                                                  How was the structure of the GAREAT
pools such as the Consorcio                    The discussions were difficult, and most        cover defined? Is there a risk exposure
de Compensación de Seguros                     of the insurers cancelled their industrial      model?
(Spain) and Pool Re (UK) is that               risk policies, as they no longer had reinsu-
                                               rance cover for terrorism. Finally a con-       The GAREAT discussions took place, not
the reinsurance market is able
                                               sensus was reached on the pool and, to          only after the WTC tragedy, but also after
to reach the level at which the
                                               a large extent, was ultimately a compro-        a major industrial catastrophe that took
State becomes responsible.
                                               mise between insurers and insureds, as it       place in the AZF chemical plant, near
The insurers and the insureds
                                               allowed all the major industrial risks to be    Toulouse. At the time, the cause of the
(when they have captive insurance              insured in January 2002. The agreement          explosion was unknown and it was gene-
companies) can also participate                was completed by a decree allowing a            rally thought that it was the first major
in the reinsurance layers and                  possible limitation of only 20% of the          terrorist attack on an industrial risk in the
subsequently allocate part or                  property sum insured for specific cover         world.
most of their reinsurance costs."              of industrial risks against terrorism.
                                                                                               Thus the studies of GAREAT’s capacity
How was the pool started?                      What advantages does GAREAT offer               concentrated on the Toulouse plant loss
                                               to its participants?                            and surroundings. The loss was roughly
Discussions about the pool started at the                                                      estimated at around EUR 1 billion for the
FFSA (French Federation of Insurance           There are several main advantages of            risks covered by GAREAT. This was taken
Companies) in October 2001, between            the GAREAT scheme:                              as a benchmark plus a margin and a EUR
insurers and reinsurers. It was difficult to                                                   1.5 billion market capacity limit which was
reach agreement but the idea slowly            For insureds it provides complete mutuality     agreed with the state.
emerged of a cover similar to the terro-       (no exclusion of any risk) with extensive
rism reinsurance scheme offered by Pool        cover against terrorism, including NBCR         As regards modelling the terrorism expo-
Re (UK), the Consorcio de Compensación         terrorism (nuclear, biological, chemical        sure in France, GAREAT does not yet
de Seguros (Insurance Compensation             and radioactive), offering unlimited cover      have full information from ceding compa-
                                                                                                               number 33 // october 2004

                                                              2004 Reinsurance scheme

                                                           MILLIONS    Estimated premium income
nies, as it is acting as a reinsurer and                   OF EUROS    EUR 260 million (all layers)
not as underwriter of each individual risk.
GAREAT is starting to gather information
on the major industrial risks (above EUR
                                                                                                        Unlimited State cover
                                                                Fourth layer: CCR
150 million) which will provide a good                                                                      through CCR
view of the pool’s exposures.

What is the price of reinsurance cover?
How is it applied?                                              Third layer:
                                                                Reinsurers & insurers                       REINSURANCE

The reinsurance price is calculated accor-
ding to a decreasing factor based on the
size of the risks, to take into account the
fact that property rates decrease usually                       Second layer:                               REINSURANCE
with the size of the risks. The reinsurance                     Reinsurers & insurers

scale is thus a way to have an almost
constant terrorism rate of the sum insured
and is calculated as a percentage of the
property premium of the risks. 6% for
                                                                First layer: insurers                   MARKET RETENTION
risks with a sum insured of less than EUR
20 million, 12% for risks between EUR 20
and EUR 50 million, and 18% for risks in                                                     Type of cover: annual aggregate cover
excess of EUR 50 million.                                                                                 Period of cover: one year
                                                                                                              (loss occuring during)

  How is Gareat structured?

Gareat has been structured as a pool          for 2004 is divided into the following 4       Seguros (Spain) and Pool Re (UK)
covering all causes of terrorism without      layers on the basis of an annual aggre-        is that the reinsurance market is able
excesses (except those stated within          gate:                                          to reach the level at which the State
the policies). The cover is divided into                                                     becomes responsible. The insurers
various layers, which include the insu-         A market retention of EUR 400 million        and the insureds (when they have
rers’ retention, the reinsurance layers         by the insurers                              captive insurance companies) can
and an unlimited cover reinsured by                                                          also participate in the reinsurance
CCR (the French public reinsurer). The          Two layers of reinsurance of up to           layers and subsequently allocate
level of the layers has been increased          EUR 2 million by the reinsurers              part or most of their reinsurance
over time as the state’s intention was to                                                    costs.
be involved only above the EUR 2 million        Unlimited cover over EUR 2 million
level.                                          by the CCR.                                  The agreement for 2004 with the
                                                                                             state was based on a 3 year period,
Gareat is a co-reinsurance market pool        The main difference between GAREAT             which gives a good outlook for the
which encompasses all insurers and            and previous terrorism pools such as           scheme until the end of 2006.
reinsurers in the market. The structure       the Consorcio de Compensación de
                  number 33 // october 2004

The average rate of the GAREAT portfolio       up to 500% of the terrorism premium in           How is terrorism defined for the
is close to 12%, which seems to reflect        equalisation reserves. As the insurers so        purposes of cover?
the direct rate for natural catastrophes in    far have not generally charged a terrorism
France on all property policies. GAREAT        premium for insureds under EUR 6                 Terrorism is defined by the French criminal
rates are reinsurance rates applied to the     million, they just pay the terrorism reinsu-     code, which is very extensive. The GAREAT
portfolio of insurers, so in theory each       rance premium without transferring the           board will have to define an act of terrorism
insurer could create its own mutuality and     cost to the insured and are able to set up       with the agreement of the state. In the
apply different direct rates to different      tax free equalisation reserves.                  event of any doubt an insurer can go to
categories of risks. In fact, the whole mar-                                                    the courts.
ket has used the GAREAT rates as a refe-       The creation of GAREAT has forced insu-
rence point and they are applied to insu-      rers to charge terrorism premiums on             All insurers and reinsurers are bound
reds, sometimes with a commission to           industrial risks, but generally to date they     by GAREAT’s decisions.
cover insurance or broking costs.              have not set up equalisation reserves as
                                               the results of the last two years have           "As regards modelling the
"The Gareat discussions took                   been unsatisfactory in the whole market.
                                                                                                terrorism exposure in France,
place, not only after the WTC
                                                                                                Gareat does not yet have
tragedy, but also after a major
                                                                                                full information from ceding
industrial catastrophe that took
                                                                                                companies, as it is acting as a
place in the AZF chemical plant,
                                                                                                reinsurer and not as underwriter
near Toulouse. At the time, the
                                                                                                of each individual risk. Gareat is
cause of the explosion was unk-
                                                                                                starting to gather information on
nown and it was generally
                                                                                                the major industrial risks (above
thought that it was the first major
                                                                                                EUR 150 million) which will
terrorist attack on an industrial
                                                                                                provide a good view of the
risk in the world."
                                                                                                pool’s exposures."
What minimum limit has been set
to cede risks to the Pool?                                                                      How does the GAREAT concept
                                                                                                vary from other pools?
The minimum limit of cession of EUR 6
million has been chosen to maximise the                                                         The GAREAT concept has been based
reinsurance capacity offered to the mar-                                                        on the example of the the Consorcio de
ket. A sufficiently low amount has been                                                         Compensación de Seguros (Insurance
chosen to transfer an adequate premium         GAREAT does not manage the equalisa-             Compensation Pool) - Spain, and Pool
to GAREAT (to pay for the high reinsuran-      tion reserves as is the case in some other       Re (UK), as well as the CCR terrorism rein-
ce capacity needed) and also high              pools, as they depend on the policies of         surance scheme (France), which was availa-
enough to allow reinsurers to give the         each insurance company.                          ble to French insurers between 1986-1995.
market the largest capacity possible for
small risks, under normal treaties.            The 2004 agreement with the state stipu-         The main differences with the pre-WTC tra-
                                               lates that from 2005 onwards, insurers           gedy public schemes was the creation of a
Is there a possibility of setting up           will have to increase their retention limit in   public-private scheme with insurers, the
equalisation reserves?                         GAREAT (second reinsurance layer) by             introduction of the private reinsurance
                                               the amount of the theoretical equalisation       market and the possibility for insurers
The discussions with the State in 2001         reserves, and set up equalisation reserves       and reinsurers to participate in various
have made it possible for insurers to put      (if possible to the full theoretical amount).    reinsurance layers.
                                                                                                                  number 33 // october 2004

What role can Europe play in manag-            It can only be considered as a second             Our pricing policy is based on this time
ing this type of risk?                         step, once all European States have               frame and must not be volatile or cyclical,
                                               accepted having national pools or, once           unless the scope of the cover or the
The idea of a European pool was discus-        viable, regional pools (if the critical mass      situation changes dramatically.
sed by the CEA at the end of 2001 and          is not enough in one country, potential
has been promoted by some risk mana-           aggregation of similar/nearby countries).         "The discussions with the State
gers, as it would solve their need for a                                                         in 2001 have made it possible for
pan-European cover.                            What future does the pool expect?                 insurers to put up to 500% of the
                                                                                                 terrorism premium in equalisation
However this seems very unlikely, for          It is very difficult to predict the future of a
some very strong reasons. Europe does          terrorism pool, as it is completely subject
not favour market solutions and pools in       to the political situation in Europe.
general, and is focused on full competi-                                                         Our target is to improve GAREAT over
tion. By its nature, terrorism is dependant    For example, some insurers predicted              time and to build an excellent scheme
upon the state’s attitude (foreign policy      that GAREAT would disappear after a               that is flexible and transparent. We also
and internal policy) and can only be dealt     year, although it was developed as a long         want to give stability to insureds and insu-
with on a national level. Finally, some sta-   term scheme. Terrorism in whatever form           rers with long term capacity, assisted by
tes do not even want their own country to      can be viewed as a long term issue,               reinsurers, the majority of whom consider
be involved, let alone other countries.        which is why it is important to have built        themselves as market partners and not
                                               this market solution.                             opportunistic players.
It is clear that a European pool would
solve some issues, but schemes are alre-       The experience of the Consorcio de                We would also like all European countries
ady difficult to develop at country level      Compensación de Seguros (Insurance                to protect their industry and their people
and current models are completely diffe-       Compensation Pool) of Spain and Pool              by appropriate policies, laws, insurance
rent, so it would first be necessary to        Re (UK) seems to indicate a need to crea-         cover and fundamentally with appropriate
reach a common viewpoint.                      te reserves for periods of 10 to 20 years.        reinsurance schemes.

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