Catastrophes come from many directions. Natural disasters, mechanical failure, human error, criminal negligence and political upheaval provide a panoply of risk. One of the core ingredients in any business plan is the assessment and mitigation of exposure. And a key tool in the mitigation process has been the use of insurance: buy a policy and pass the risk on.

For those operating in the Middle East some risks have become more pronounced: the attacks on the USS Cole and the Limburg, as well as reports of Al-Qaeda activity in Kuwait and Yemen, have focused attention on the regional terrorist threat. In addition, nine months of sustained bellicose rhetoric from Washington on the need for regime change in Baghdad has raised the prospect of another war in Iraq.

Against such a backdrop, regional executives have been checking the small print on their insurance policies to see if they have cover.

Just as attitudes towards the need for insurance might be changing, so access to it - the availability and price of specific cover - has been dramatically altered over the last year.

'Depending on the sort of cover needed, Middle East premiums have risen dramatically, maybe 400-500 per cent in some cases, over the last 12 months,' says Mike Bignall, a director at Miller Consulting Services. 'This hike has been accompanied by limitations on capacity: not everyone is getting the full cover they might want.'

The first signs of such seismic shifts in the nature of the market were visible before 11 September 2001, but the process accelerated dramatically in the aftermath. 'It is important to realise that 11 September was the catalyst, not the cause,' says Tony Prior, director of asset and risk management at the consultancy Currie & Brown. 'Insurance companies were just looking for an excuse to raise premiums. Prices had been falling faster than the risk and no-one was making a profit from underwriting.'

For most of the 1990s, the problem was solved by strong investment income. But since the start of 2000, global financial markets have been in decline, pulling away this pillar. 'When 11 September happened they grabbed the opportunity to hike premiums, even though from an actuarial perspective terrorist activity is very difficult to assess,' says a London-based insurance broker. 'But this hasn't prevented premiums from ballooning.'

Not only has access to insurance changed, but the structure and terms of cover have also been revised - largely to the detriment of clients seeking insurance. For example, deductibles have increased dramatically. More striking, however, has been the change in status of terrorism cover.

The sage of Omaha, Warren Buffet, explained the shift in thinking after his insurance company, Berkshire Hathaway, posted a net loss of $2,280 million in the third quarter of 2001 due to a massive charge for exposure to the terrorist attacks on the World Trade Centre: 'A mega-catastrophe is no surprise. One will occur from time to time, and this will not be our last. We did not, however, price for man-made mega-cats, and we were foolish in not doing so. In effect we, and the rest of the industry, included coverage for terrorist acts in policies covering other risks - and received no additional premium for doing so. That was a huge mistake and one that I myself allowed.'

No-one is making such a mistake now. 'Effectively full terrorism cover could be got on most risks for free,' says John Eltham, a director at Miller Insurance Services. 'Since 11 September it has had to be bought separately and there is a ceiling on the maximum cover available.' London brokers say that, using everyone in the market, the ceiling on terrorism cover would be about $800 million, and that finding cover beyond $100 million-150 million is difficult.

The main result of the terrorism constriction is that few facilities of significant size have full insurance: cover is now based on projections of probable maximum loss (PML) and estimated maximum loss (EML). 'Premiums for terrorism cover now start at a base of 0.05-0.10 per cent and increase from there,' says Eltham. 'You now have to choose if you take cover or not.'

In a similar fashion, the availability and pricing patterns of war and political risk cover have altered in recent months. Given concerns over potential conflict in Iraq and memories of Scud missiles striking Bahrain and Saudi Arabia during the 1991 Gulf war, demand has been rising but supply is comparatively inflexible and expensive. 'Certain providers are still happy to write sizeable political risk, but you won't find any long-term policies any more,' says a London-based broker. 'In other parts of the developing world you can find up to 15-year policies. In the Middle East you won't get more than three years.'

'War on land' cover is a particularly scarce commodity. Bahrain-based Arab War Risk Insurance Syndicate (AWRIS) was set up by a group of regional insurance companies in 1980 as a result of the outbreak of the Iran-Iraq war and continues to offer war and terrorism cover to the region. 'This is a highly specialised business and premiums have risen dramatically over the last 12 months,' says the broker. 'Capacity has also been reduced. Put simply, cover is still available, but at a price.'

For most businesses, the equation appears daunting: the perception of regional risk is growing, but access to one of the key mitigating tools is becoming both constricted and more expensive. 'You now have a situation in which some Middle East clients are looking at annual premiums that are millions of dollars a year higher than they were 15 months ago,' says another London-based insurance broker. 'And for this they are getting reduced cover. It's no surprise that we are seeing some clients declining to seek insurance and bearing the risk themselves. Ultimately this is not good for anyone.'

The availability of only limited cover, and a sharp spike in its cost, has major implications for the developers of projects - from power stations to oil refineries and manufacturing plants - right across the region. The decision to buy terrorism, war or political risk cover is not always theirs: often the banks that provide finance for such projects will demand protection.

'Of course the banks want appropriate levels of insurance where it is available, and some banks with limited experience in the region might drop out of transactions if it is not provided,' says Chris Vermont, head of project and structured finance at ANZ Investment Bank. 'But we understand that since 11 September it has not always been available at reasonable prices. It doesn't take a big hike in premiums to really chew up margins.'

The threat to project development is real. 'We have not got to the stage at which entire projects have been cancelled because of sky-high insurance costs,' says an international banker active in the region. 'But we have seen some projects threatened and it has led to serious complications and delays on others.' Insurance has become a significant issue for financiers for two reasons. First, much higher premiums have a direct impact on any borrowing company's cashflow. Second, and increasingly the most important issue, a lack of comprehensive cover can make it difficult to get internal credit approval for lending proposals. 'This is getting really serious, and we are at the point where the availability and extent of insurance cover can dictate whether we are allowed to lend or not,' adds the banker.

Such problems have been circumvented by a number of routes over the last year. For example, on Qatar's Ras Laffan independent water and power project (IWPP), the financiers' blushes were spared by the government stepping in and providing an insurance guarantee. On the more recent Qatar GTL borrowing, no attempt was made to get government support. Instead, the bankers accepted borrowers' covenants and a number of provisions detailing the conditions under which acceptable insurance is either unavailable or prohibitive and the regularity with which the borrowers have to approach the market.

There are other options available - not just for project developers seeking finance, but for all companies operating in the region faced with either prohibitively high premiums or reduced capacity. One that is attracting greater attention is alternative risk transfer (ART). ART is based on the use of non-insurance tools such as post-loss funding, which sees clients buying bank guarantees for loans to cover the cost of repairs. 'When conventional capacity is constrained, alternatives like ART get looked at more closely,' says an insurance broker. 'We are beginning to see appetite increasing from Middle East customers.'

And these alternatives might become increasingly attractive if forecasts of future premium trends are accurate. 'Premiums are going to carry on rising in 2003,' says a broker. 'Not at the rate experienced since 11 September, but still moving upwards.'

Whatever the pricing patterns, executives in the Middle East will have to ask themselves difficult questions about their appetite for risk. Such questions were faced last year at Societe Anonyme Marocaine de l'Industrie de Raffinage (Samir). The fateful decision was taken, in the face of rising premiums, to stop taking out insurance against business interruption. Last month's fire at the Mohammedia refinery - which could take nine months to repair fully - will have left some Samir executives wishing a different decision had been taken.