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Last Updated: Friday, 16 April, 2004, 05:25 GMT 06:25 UK
Counting the rising cost of fear
By Mary Hennock
BBC News Online business reporter

Freed Japanese hostages Nahoko Takato (left) and Noriaki Imai
Relieved to be freed alive

Violence and kidnappings against foreigners in Iraq are starting to make war insurers sweat and look certain to inflate the cost of reconstruction.

Even before the April uprisings in central and southern Iraq, foreign contractors faced frequent bombings, drive-by shootings and banditry.

But it is 40 kidnappings in just over a week that has led foreign aid agencies and firms to pull out staff.

The underwriters are still quoting. They're waiting to see how this week pans out
Willis insurance broker

"The insurance market is starting to sit up a bit over all of this," says Colin Adams, chief executive of BCCB, a lobby group that counts many of the 35 UK firms in Iraq among its members.

From cheers to tears

Last month, Mr Adams was celebrating as British branches of US engineering giants won a chunk of the deals in a Pentagon bonanza worth $18.6bn (10.3bn). UK subcontractors indirectly benefited too.

But as the violence gets uglier, contractors' smiles are tightening. "No comment" is all that many of them are willing to say about Iraq now. Avoiding the spotlight helps protect their staff.

Shia protestors
More unrest is on the cards ahead of the transfer of power

But they face nail-biting decisions about whether to withdraw staff and how to beef up security.

As safety fears grow, the price of doing business in Iraq will too, bringing financial pain either to companies or - if government contracts overspill their budgets - to taxpayers.

Insurers are in the most immediate pain. They are swallowing losses, and they do not like it.

"Although they're still giving cover, the premiums are going up," says Mr Adams.

"The underwriters are still quoting. They're waiting to see how this week pans out," says a source at global top-three insurance broker Willis Group in London.

"I've talked to various UK companies who're competitors...I know they're having trouble with the right insurance," says Jim Wilson, business development manager at Black & Veatch in Europe. The Kansas-based group is working on restoring clean water in Iraq.

David Bruce writes war risk personal accident policies at the Hiscox syndicate, part of Lloyd's of London.

He is frank about his losses, and worries: "There may be a day when we come in the office and say we can't take anything more."

Spiralling costs

If war risk insurers decided to shun Iraq contracts, contractors would have to pull out, or governments step in.

More protection needed?
Two men struggle to douse blazing trucks, April 2004
Coalition forces provide some security
15,000 UK civilians in Iraq
10% are security guards
Source: BCCB

That is not imminent, but insurers are toughening up.

They are telling companies to accept more risk themselves - in much the same way that homeowners who get burgled must fork out the first 50 on a stolen TV. For Iraq contractors, this means bigger initial liability for deaths and injuries.

Another problem is that the cost of personal accident cover in war zones is linked to payrolls.

If wage bills rise because firms need to pay their staff more to go to Iraq, or hire more security guards, this pushes up the insurance bill.

If a firm with an Iraq payroll of 10m promises death payouts of five times someone's salary then its total liability will be 50m. But now insurers are capping their losses, so cover might run out at 25m.

This may mean contractors borrowing or freezing funds to be sure they can pay the other 25m in a catastrophe.

Mr Bruce is unapologetic: "There's only so much money I can afford to lose."

He also believes tougher policies are humane. "I genuinely feel that before that cap runs out, some of these construction firms would say 'I've lost far too many people - I'm going to pull out'".

Security skills shortage

Personal accident is only one of a slew of policies needed in Iraq. There is cover for raw materials, vehicles and buildings, and cash.

Most sensitive of all is kidnap and ransom (K&R) cover. Take-up of K&R is "beginning to change quite dramatically", says the Willis source.

Inside Lloyd's of London, the world's biggest insurance market
Iraq does not feature on Lloyd's list of Realistic Disaster Scenarios

Understandably, no one wants to talk much about this subject. "You put lives in jeopardy and that is not the idea," says Mr Bruce, who chairs Lloyd's personal accident panel.

Getting K&R cover depends on satisfying insurers about security arrangements, and training staff in survival skills, which can cost of thousands of pounds for a week-long course.

Pay for security guards is climbing amid "increasing competition" for a shrinking pool of ex-soldiers with the right skills, according to a spokesman for Special Contingency Risks, a K&R broker and security consultant.

Market meltdown?

So could insurance losses in Iraq push up household premiums for British and American voters as happened after 11 September 2001?
Insurers' costliest single disaster
The site of the destroyed World Trade Centre in New York
11 September 2001 cost insurers $40bn worldwide
2003 global losses from catastrophes $70bn
Source: Swiss Re

Definitely not, says Ben Garston, a partner at Map syndicate who chairs Lloyd's Terrorism Panel.

Iraq is "tiny percentage" of the risk Lloyd's will shoulder this year, he says. Exposure to worldwide terrorism cover is bigger, but "not huge".

"There's a small specialist market within Lloyd's that offers this (terrorism) insurance," he says.

Lloyd's, the world's biggest insurance market, does not even include Iraq on the list of exposures it monitors centrally.

Who pays?

It seems the bulk of any extra costs on Iraq contracts will eventually be shouldered by taxpayers, though companies may suffer financial constraints on the way.

The Pentagon's $18.6bn-worth of contracts were drafted to cover costs, then add on profits up to a pre-set limit.

"Whatever we spend, it's reimbursable," says a spokesman for Amec, whose FluorAmec joint venture got a deal to restore water supplies.

But not all firms are so confident, and most are saying little.

Risky business in Iraq
15 Apr 04  |  Business

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