Policyholders to benefit from Pool Re’s new treaty structure

UK policyholders, insurers and tax payers are expected to benefit from the shift of state-backed terror insurance facility Pool Re from its current facultative obligatory form to an aggregate catastrophe excess of loss treaty structure in April 2025.

Pool Re has announced that its members and HM Treasury have backed formal proposals from its board to make the change.

“These approvals pave the way for a modernised aggregate catastrophe excess of loss treaty, which will ensure the scheme remains relevant and is fit for purpose in the digital age,” it said.

There will be no changes to the fundamental rules of the scheme and the coverage provided, but the proposal will allow members more flexibility to underwrite commercial terrorism property damage and business interruption risks in line with their strategic priorities and risk appetite.

Pool Re believes this will create the conditions necessary to support members in driving greater take-up of terrorism cover, returning risk to the private market, further distancing the taxpayer from the financial consequences of terrorism, and bolstering the UK’s economy resilience.

The reinsurer’s chief executive, Tom Clementi, told Commercial Risk Europe last summer, when the scheme’s structure was under review, that corporate policyholders would benefit from the change.

Pool Re members insurers currently cede property terrorism risk to a reinsurer on a risk-by-risk basis, explained Clementi at the time. Pool Re then charges a premium for each individual risk depending on the zone in which it is located. “Typically, that cost is passed back to policyholders plus a small markup, so that in practice Pool Re drives members’ pricing for terrorism risk in the direct market,” he said.

Under the treaty reinsurance system, rather than ceding risk to Pool Re on an individual risk-by-risk basis, the reinsurer will take members’ exposure and charge a single price to reinsure the totality of their portfolio in a classic treaty reinsurance structure, explained Clementi.

As it announced the new structure, Pool Re identified three core benefits from the change:

• More risk-reflective pricing: the updated scheme will provide members with reinsurance cover that is priced in a more sophisticated and risk-reflective way.
• Members’ reporting obligations will simplify, with members only required to provide an annual exposure return, reducing their administrative burden.
• Choice and flexibility built into the new treaty arrangements will allow members to choose their own preferred retention level, subject to a minimum retention specified by Pool Re, and so take on more terrorism risk.

Clementi, said: “Members and HM Treasury have given Pool Re a very clear and exciting mandate to continue Pool Re’s modernising journey. When Pool Re was founded some 30 years ago, it was never intended to be a permanent, static and definitive solution. Our job was always to correct a market failure, and to provide opportunities for the industry to take more terrorism risk onto its own balance sheet and normalise the market. The change to an aggregate catastrophe excess of loss treaty is the best possible outcome for both members and the taxpayer.”

Economic secretary to the treasury Bim Afolami added: “Pool Re has worked hard on its plan to modernise its reinsurance offering, and I am pleased that Pool Re’s proposals are supported by its members as well as the government. I look forward to seeing the impact of the change for members, customers and the terrorism insurance market.”