A new insurance company set up with backing from XL Capital specifically to provide terrorism cover for companies in Europe has ceased business due to lack of demand.

The demise of Special Risk Insurance & Reinsurance Luxembourg (SRIRL) set up in July 2002 by XL Capital, Allianz, Hannover Re, Swiss Re and Zurich appears to indicate that while the domestic US market for terrorism cover may have increased over past weeks, there has been no surge in demand for terrorism cover in the European and world-wide market.

SRIRL chief marketing officer Thomas Baumgartner was reported as saying that SRIRL had decided to close down the business with immediate effect since "our perception that client interest would be high has simply not developed into reality, in spite of the fact that today there is a greater awareness and knowledge of terrorist activity and of the potential for substantial loss".

According to Jim Bryce of IPCRe Holdings, the demand for terrorism cover in the US has also been muted, despite the existence of an insurance programme backed by the federal government.

The Terrorism Risk Insurance Act of 2002 (TRIA) required US-based insurers to offer cover for losses due to acts of terrorism by foreign individuals. The statutory guidance on pricing was that it should be "adequate" but not "excessive."

In assessing what is "adequate", insurers have tended to price the cover high because the only loss data from the World Trade Centre indicated that terrorism losses would be catastrophic. The vast majority of companies seeking cover simply could not afford those premiums.

"The problem is that the economy is driving down profit margins, if your profit margin is already slim and buying terrorism cover would throw you into the certainty of loss, people are not going to buy the coverage." said Mr. Bryce.

The Wall Street Journal reported yesterday that Bermuda-based ACE has seen an increase in demand for terrorism coverage that extends beyond the federal terrorism-insurance act to domestic terrorism.

According to the article: "One reason buyers are interested in broader provisions is the worry the government might not be able to determine the nationality of a terrorist killed in an attack. Most insurers offer only coverage that aligns with the government's terrorism-coverage provisions."

Mr Bryce comments that on the contrary, some companies appear to be looking to avoid terrorism cover altogether. Where governments have made terrorism cover compulsory, as in France, there has been a good take up rate. But where it is not compulsory such as in Germany, companies are deciding against the extra expense. The logic appears to be that if a business is up against difficult conditions, they are more likely to go out of business if they pay out high insurance premiums than due to a terrorist attack.

Anthony Taylor, chief executive officer of Montpelier Re said that Montpelier is not a member of the TRIA facility at the moment and offers terrorism cover on a worldwide basis, generally to multinational companies. In his opinion, there does not seem to have been an increase in demand for terrorism cover in the run up to war.

"As far as terrorism cover is concerned, we really haven't seen an increase in the past two weeks. What we have had is enquiries for death cover on lives in the Middle East. We have made some quotations to protect groups of people, some of them in the armed forces but we actually haven't got any order to date and now that hostilities have started the quotations have lapsed."

Mr. Bryce points out that as well as SRIRL, Terminus, another terrorism cover specialist in Germany is suffering from a lack of business.

"If these were booming times with everyone flowing with profit, that would be another, story."