THE COUNCIL,

HAVING REGARD to Article 5 b) of the Convention on the Organisation for Economic Co-operation and Development of 14 December 1960;

CONSIDERING that, on the occasion of the OECD meeting at Ministerial Level on 15-16 May 2002, Ministers mandated the OECD to develop "policy analysis and recommendations on how to define and cover terrorism risks and to assess the respective roles of the insurance industry, financial markets and governments, including for the coverage of ‘mega-terrorism’ risks" [See OECD Council at Ministerial Level, 15-16 May 2002: Final Communiqué PAC/COM/NEWS(2002)58];

CONSIDERING that this Recommendation does not aim at a general definition of terrorist acts, but at an attempt to define the concept of terrorism for the purpose of compensation;

CONSIDERING that this Recommendation does not aim at proposing a single and exhaustive international definition, but at developing a checklist of key elements of definition which OECD and non-OECD countries could take into consideration; noting that this checklist is therefore illustrative, and can be adapted by the various parties concerned to meet the needs of their specific market and regulatory frameworks or policy objectives; recognising that certain countries may also wish to take other criteria into consideration, to help distinguish terrorism from other types of offence;

CONSIDERING that the definition criteria are not binding and that the consideration of these elements may be useful for governments establishing a scheme for the compensation of terrorism related losses and for private sector insurance entities;

CONSIDERING that it is left to each country/entity to define its own criteria more precisely, possibly quantitatively or qualitatively when relevant, according to their specific policy and technical consideration;

On the proposal of the Insurance Committee:

RECOMMENDS that Member countries and private sector entities involved in the compensation of terrorism related losses consider, when defining terrorism for the purpose of compensation, the checklist of criteria for definition which is set out in the Appendix to this document of which it forms an integral part.

INVITES non-members to take due account of the terms of this Recommendation.

 

APPENDIX

CHECK-LIST FOR A DEFINITION OF TERRORISM FOR THE PURPOSE OF COMPENSATION

This check-list is meant to help private sector entities as well as governments involved in terrorism compensation to define terrorist acts and criteria relevant to determine which terrorist acts can be indemnified, be it through private insurance mechanisms or through other compensation mechanisms. This check-list is illustrative, and neither binding nor exhaustive; it can be adapted by the various parties concerned to mirror specific market and regulatory frameworks or policy objectives.

The following criteria may be considered when defining terrorism acts for the purpose of compensation.

A)         Elements of Definition of a Terrorist Act, which could include[a]:

Criterion 1 - Means and Effects

A terrorist act is:

·         An act, including but not limited to the use of force or violence, causing serious[b] harm to human life, or to tangible or intangible property,

·         Or a threat thereof entailing seriousb harm;

Criterion 2 - Intention

A terrorist act is committed or threatened:

·         With the intent to influence or destabilize any government or public entity and/or to provoke fear and insecurity in all or part of the populationb;

·         In support of a political, religious, ethnic, ideological or similar goal.

B)         Factors of Insurability, which could include:

Criterion 3 - Technical Insurability[c], including in principle:

·         Assessability (probability and severity of losses should be quantifiable);

·         Randomness (the time at which the insured event occurs should be unpredictable when the policy is underwritten, and the occurrence itself should be independent of the will of the insured);

·         Mutuality (numerous persons exposed to a given hazard should be able to join together to form a risk community within which the risk is shared and diversified).

Criterion 4 - Economic Insurabilityc, which could depend on the following elements:

·         Magnitude of potential losses: it should in principle not exceed the capacity of the private insurance/reinsurance market or the capacity of a mix of private and public multi-layer mechanisms when these exist. The insurability of the risk will be assessed against the maximum aggregate amount of funds made available by the various potential stakeholders (insurers, reinsurers and, possibly, pooling mechanisms allowing (inter)national spreading of risks, and governments) reflecting their respective capacity. The quantitative segmentation of risks, i.e. The threshold/sub limits (the nature and the amount of sub-limits, and the basis on which they should be calculated) should be defined ex ante;

·         Nature of the potential losses: to be insurable, potential losses should correspond to the lines of business that the available insurance mechanisms are able to cover. The list of business lines to be covered should be defined through an ex-ante qualitative segmentation of risks.

·         Price of cover: for the risk to be insurable, it should be possible to set an adequate and actuarially fair insurance premium;

Criterion 5 - Legal/Regulatory Insurability

Regulatory authorities may decide that a given risk, or type of risk (e.g. worker compensation, business interruption), is -- explicitly or implicitly -- defined as insurable, for instance through a certification procedure and/or if insurance against this risk is made compulsory. In this case, a risk may be labelled as insurable while other insurability criteria may not be met.

C)         Factors of Compensability (Insurance Excluded), which could include:

Criterion 6 - Compensability by the State

States need to decide about the possibility of compensation on the basis of their own public policy concerns. The risk should not exceed in magnitude the maximum financial involvement that the State is able or willing to supply for the compensation of losses entailed by terrorism.

Criterion 7 - Compensability through Non-Governmental Mechanisms

The technical characteristics of the risk should allow it to be covered through financial mechanisms other than insurance, for instance bonds placed on capital markets.


[a]                  Certain countries may wish to take other criteria into consideration. The criterion of affiliation to a group or organisation, for instance, has been successfully used in several Member countries to define terrorism acts. Similarly, certain countries may wish not to take into account certain elements mentioned for their own definition of terrorist acts. For instance, the concept of “threat” of terrorism is not considered as a relevant element of definition of terrorism acts in certain countries.

[b]                  It is left to each country/entity to define the criteria more precisely, possibly quantitatively or qualitatively when relevant, according to their specific policy and technical consideration. It should however be noted that at least one OECD country has adopted a definition of terrorism based exclusively on qualitative criteria.

[c]                  It should be remembered that, unless terrorism risk insurance has been made compulsory, the determination of the insurability of a risk by private entities ultimately depends on internal analysis and appreciation of the insurance/reinsurance company(ies) at stake. A (re)insurer may decide, for commercial or strategic purposes in particular, to cover a risk that may not easily meet the theoretical criteria of insurability. It may also decide not to cover a risk, to take into account for instance concerns regarding its solvency situation or the balance of its risk portfolio at a given moment in time.