June 8 (Bloomberg) -- Extremus Versicherungs-AG, the German government-backed insurer set up to cover terrorism-related claims following the Sept. 11 attacks in New York, expects premium income to rise this year as real estate companies seeking funding from banks are forced to buy more coverage.

“While premiums have stabilized, we are clearly selling more policies,” Chief Executive Officer Leo Zagel said in an interview. “We currently have 1,400 contracts, up from 1,302 at the end of 2008.”

Annual premiums may rise 8.2 percent to 54 million euros ($75 million) this year, compared with 49.9 million euros in 2008, Zagel said. The Cologne-based company, which insures 10 of Germany’s 12 largest airports, last year missed a goal to increase the figure to 70 million euros as premiums fell 30 percent, “almost exactly in line with declining rates for commercial fire insurance, to which they are closely linked,” Zagel said on June 5.

Governments worldwide set up national insurance funds to cover terrorism risks including for airlines and buildings within their home countries after the attacks of Sept. 11, the third most costly insurance loss after Hurricane Katrina and Hurricane Andrew. They pick up coverage other insurers don’t offer, and compete with Lloyd’s of London, the world’s biggest insurance market, for some business.

Bank Financing

“During the past year, real estate investment funds and property companies were one of the terror insurance market’s growth areas as they needed to buy more such cover to get financing from banks,” said Jochen Koerner, a member of the executive board of insurance broker Marsh & McLennan Cos. in Germany and Austria.

Allianz SE, Europe’s largest insurer by market value, Munich Re, the world’s biggest reinsurer, and 14 other insurers set up Extremus in 2002 to cover property and business- interruption claims of between 25 million euros and 1.5 billion euros in Germany.

Munich Re and Allianz’s German insurance unit are Extremus’s biggest shareholders, with a 16 percent stake each. Swiss Reinsurance Co.’s German unit owns 15 percent while the industrial insurance unit of Talanx AG, Germany’s third-biggest insurer, holds 13 percent, according to the Web site of Extremus. Other investors include American International Group Inc.’s European unit and the German unit of Zurich Financial Services AG.

U.K. and U.S.

Other countries have similar arrangements. In the U.K., Pool Reinsurance Co. has covered terrorism risks to commercial property since it was founded in 1993 following terrorist attacks related to the conflict in Northern Ireland. The group had 173 members at the end of 2008 including Lloyd’s of London underwriters such as Hiscox Ltd. and the U.K. units of Allianz and Swiss Re, according to its Web site. Should claims exceed Pool Re’s reserves it can draw funds from the U.K. government to meet its obligations in full, regardless of the scale of losses.

The U.S. created the Terrorism Risk Insurance Act in 2002, which was prolonged in 2007 to run through 2014. The program provides $100 billion in capacity to the U.S. insurance industry for terrorism risks.

Each national insurance pool steps in where insurers won’t cover risk within their home market. Extremus insures ten of the 12 biggest airports in Germany while one is insured in London and the other one hasn’t bought terror coverage, Zagel said.

“There is no full alternative for our terror risk coverage in Germany,” Zagel said. “The London market, for example, wouldn’t be able to shoulder an accumulated risk such as the city of Frankfurt, where we protect property worth more than 50 billion euros.”

Renewed Backing

Extremus is in negotiations with the German government about the prolongation of an 8 billion-euro state guarantee, which comes on top of 2 billion euros guaranteed by Extremus and runs until the end of this year.

“Talks with the government about an extension of the guarantee are very constructive and we expect a result by the end of this month,” Zagel said. “But it’s not clear yet if the state will reduce its guarantee or not.”

The government last renewed its backing for Extremus in November 2007 for two years, ending speculation at the time that it would be reduced or terminated. Even so, the government’s participation may be scaled back from 2010, the German finance ministry said at the time.

Insured losses of $22.8 billion excluding liability and life insurance losses made Sept. 11 the third most costly insurance loss after Hurricane Katrina, which cost the insurance industry $71.3 billion, and Hurricane Andrew, which cost insurers and reinsurers $24.6 billion, according to Swiss Re.

The most expensive terrorism attack in Germany was the 1993 bombing of a newly built prison in Weiterstadt, which cost insurers about $80 million, according to Swiss Re estimates.

“Risk awareness for terror cover could be higher, but it’s typical for the insurance industry that this doesn’t change until a major loss occurs,” Marsh’s Koerner said.

To contact the reporters on this story: Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: June 8, 2009 05:54 EDT