Promoting growth of the terrorism / PV market

Proposed changes to Pool Re are geared towards giving members more flexibility and choice around how they want to underwrite terrorism in line with their own risk appetite.

Tom Clementi, CEO of UK Government-backed terrorism reinsurer, Pool Re, was the latest guest on Mark Geoghegan’s Voice of Insurance podcast.

Pool Re is unusual among reinsurance providers, due in large part to being a government entity, in that it actually aims to reduce its own role, over time, by encouraging the development of the terrorism re/insurance private market.

Pool Re is classified as a UK Central Government Organisation by the Office for National Statistics, and the UK Cabinet Office has designated it as an arm’s length body of the UK Treasury, which provides the fund with an unlimited government guarantee.

Clementi took the reins in 2022, and is overseeing a shift in Pool Re’s role, from a risk-by-risk facultative reinsurance provider – with insurers opting to pay a portion of premium into it when they write terrorism business – into a new era in which it proposes to become a state-backed treaty reinsurer, taking on terrorism risk on a catastrophe treaty aggregate excess of loss basis.

“When Pool Re was set up some 30 years ago, it was never intended to be a permanent, static, definitive solution. Our job was always to correct a market failure, but actually provide opportunities for the industry to take more terrorism risk onto its own balance sheet and normalise the market,” Clementi explained.

The shift increasingly towards being treaty reinsurer for its members is the latest phase of its evolving role in the market, he suggested. It follows a lengthy consultation with members in the market.

“We’ve always had that mandate, and therefore, we’ve always been trying to evolve the scheme to return more risk and premium back to the private market,” Clementi said.

It’s driven by several factors, he explained, the first of which is a government desire to increase terrorism insurance penetration in the UK, currently at about 6%, but particularly low among small-to-medium-sized enterprises (SMEs), with the goal of making firms, and the country more resilient to terrorism. The Covid-19 pandemic showed up this vulnerability of SMEs to a short to medium term denial of access to their premises, he highlighted.

“The changes that we’re making will help or at least encourage our members to reintegrate terrorism back into their standard property [insurance] policy wordings, and that’s really the Holy Grail,” Clementi said.

This goes back to the circumstances of Pool Re’s birth, the IRA’s early 1990s bombing campaign against mainland Great Britain, which struck targets in the City of London, and led to the exclusion of terrorism from mainstream property insurance, creating a necessity for a government entity to intervene.

“The second thing we’re trying to do is to return more risk and more premium back to the private market. And that’s something the government’s very keen on, because in doing so, we help to distance the British taxpayer from picking up the tab, should there be a terrorist attack,” he said.

Clementi revealed that the UK’s financial markets regulator, the Financial Conduct Authority (FCA) is keen on injecting more competition into the market through Pool Re’s transition to treaty.

“We’re moving from that to a cat treaty model, where we’ll say to our members: ‘Give us all of your exposure and we’ll charge you a single price to cover the totality of your portfolio, and it’s completely up to you what you charge your underlying policyholder. You have much more flexibility to underwrite the risk in line with your own underwriting strategy and your own risk appetite.’”

The hope is then that the member insurers will return terrorism to their policies for relatively little additional cost, leading to many more businesses – particularly SMEs – covered against terrorism.

Pool Re’s exposure will rise, he suggested, with treaty prices driven by probable maximum loss in peak zones, such as within EC3 and the City of London, rather than lower risk postcodes around the UK.

Pool Re will also be bifurcating its retention structure, Clementi explained, splitting conventional terrorism, primarily bomb blasts, from non-conventional terrorism, which would include chemical, biological, radiological and nuclear threats.

“If we can break that parallel into two, we can encourage our members to retain more risk on the conventional side, recognising their appetite will remain pretty limited on the nonconventional. That’s a way of returning risk and premium back to the private market, and distancing the British taxpayer from the financial consequences of terrorism,” he said.

Member concerns in consultation focused on the cost of the treaty approach and a difference in retentions.

“The watchword for us as we’ve been proposing these changes is stability. In year one, we’d expect the price to be pretty consistent with the tariff rates that members will be familiar with today,” Clementi said.

Beyond that, price rises and decreases, and any market disruption, will be limited through a cap and fall mechanism “to no more than plus 10% or minus 4%,” he revealed, while giving insurers increased flexibility to underwrite terrorism in line with their own risk appetites.

“And on the retention side, retentions will be broadly the same. Members will be able to buy down to their existing retention levels, if they so choose, they’ll be incentivized to retain a bit more than they currently are. But if they want to retain a lot more, they’ll get a corresponding reduction in their premium. Members will have choice for the first time around their retention levels,” Clementi added.