New attack a threat to insurers

THE insurance industry may struggle to cover compensation requests 'without endangering its financial stability' in the event of another terror attack on the scale of 11 September, the Organisation for Economic Co-operation and Development has warned.

In its twice-yearly report on Financial Market Trends, the Paris-based think-tank said that in 2001 the world's general insurance and reinsurance industry had £277bn capital and reserves, of which about £72bn were available to cover large commercial risks.

Losses from the terror attacks on the US in 2001 were covered, but 'another similar-sized loss would severely test financial resources', said the OECD.

Reinsurers would be most threatened, as 'they will eventually bear an estimated 70% of the total insured loss' for 9/11.

The OECD expects the US Federal Reserve and European Central Bank to edge interest rates higher this year. US rates could rise in the second quarter and eurozone rates later.

There is a 'high probability' that UK rates will rise again in the short term and the OECD also expects a rise in Japan.

As 'baby-boomers' born in the 1960s enter middle age, savings rise and a growing demand for assets may put upward pressure on share and bond prices, the report says.

But when they retire, they may sell assets 'putting downward pressure on financial asset prices'.