Pool Re to invest in terrorism risk management solutions

Pool Re is embarking on a new chapter that will see the UK’s state-backed terrorism reinsurer modernise its reinsurance offering, invest in risk management solutions and explore options for systemic risk, its new CEO told Commercial Risk.

Pool Re has gone through a challenging few years. In 2020, the reinsurer’s future role looked uncertain after its reclassification as a government entity by the Office for National Statistics and the launch of a five-year review by HM Treasury. In 2021, CEO Julian Enoizi announced he was stepping down after eight years at the helm.

The reinsurer has since appointed Tom Clementi, formerly CEO of Lloyd’s insurer MS Amlin Underwriting, as its new CEO. Crucially, it recently reached an agreement with the government on its future status, governance and scope of works under the HM Treasury five-year strategic plan and framework agreement.

The agreement, approved by Pool Re members and its board in March, included a five-year extension to the government’s unlimited guarantee, which acts as the ultimate backstop should Pool Re’s resources be exhausted by a catastrophic terrorist attack.

“We are in a good place now that the HM Treasury review has been finalised. We kept the unlimited guarantee, which sits as the cornerstone of our scheme, which was a good outcome for Pool Re. We have also retained our mandate from government to continue to try to return risk to the open market,” said Clementi, who started his new post in April.

The framework also sets out Pool Re’s role and relationship with HM Treasury as an ‘arm’s-length’ body. The board of Pool Re remains responsible for setting its strategic direction and governance, while the pool’s funds remain in Pool Re’s sole ownership.

“We are now an arm’s-length body of HM Treasury and have formally signed up to the [HM Treasury] framework agreement, and need to figure out how to become a good arm’s-length body, and engage fruitfully and meaningfully with government,” said Clementi.

He said that one of the standout successes of the review is a reduction in the price of Pool Re’s terrorism reinsurance, which should result in lower insurance prices for policyholders and in turn encourage more businesses to adopt vital terrorism cover.

“Together with the unlimited guarantee from HM Treasury, which enables Pool Re to provide comprehensive terrorism cover, including for CBRN [chemical, biological, radiological and nuclear], we believe this significant price reduction will help provide increased resilience for businesses across the country to terrorist events,” said Clementi.

Pool Re will reduce the scheme’s overall pricing by an average 20% in a drive to allow more businesses to access terrorism reinsurance. The extent of the reduction will vary according to geographical location and could be as high as 30% in non-urban areas. The reduction should lead to a “commensurate reduction” in insurance prices, although scheme member insurers are responsible for setting pricing for their own policyholders.

The price reduction, which will come into effect from October, was made possible through a combination of improved understanding of terrorism risk, reduced retro-reinsurance costs and better modelling, explained Stephen Coates, chief underwriting officer at Pool Re.

“We made the argument to government through the review that scheme pricing should reduce. We have not had a significant claim since 1996, and during that time reinsurance rates have come down significantly. Our own retrocession costs have reduced since 2015 by about 15%-16%. But the main reason is our better understanding of the risk due to our investment over the past three or four years in modelling and quantifying the threat,” he said.

HM Treasury’s strategic plan gives Pool Re a “full in-tray” for the next five years, according to Clementi. The scope of works includes plans to modernise Pool Re’s reinsurance offering, moving to a treaty reinsurance model. It also includes ‘bifurcation’ of member retentions to enable Pool Re’s insurers to retain more conventional terrorism risk without increasing their exposure to non-conventional terrorism risk.

“We need to ensure the reinsurance scheme, which has been operating for 30 years, is fit for purpose and meets the needs of all our stakeholders. The move to treaty and to bifurcate terrorism risk will help us to modernise the scheme and return risk back to the private market, and will give our members greater flexibility to charge what they feel is appropriate to their policyholders,” said Clementi.

Pool Re also plans to grow out its terrorism risk management business Pool Re Solutions, which conducts risk analysis and provides risk management tools and advice to large companies. Subject to HM Treasury approval, Pool Re Solutions plans to build out a self-service terrorism risk management portal with tools and information to assist companies.

Pool Re already offers a free vulnerability self-assessment tool (VSAT), through which large companies can receive a loss mitigation credit if they meet certain criteria. Pool Re recently revamped VSAT by increasing the credit to 10% of premium, up from 7.5%, and increasing discounts for self-insurance.

“It’s early days and the scope of works was only finalised last month. But we are confident and there is plenty of good work lined up to return risk to the private market and develop the risk management piece. That is front and centre to the resilience piece – to try to stop things happening in the first place, rather than just being there with a big cheque book post-event. We have good plans in that space, driven by Pool Re Solutions,” said Clementi.

Pool Re’s strategy will also see the reinsurer explore potential solutions for systemic risks that are either too large or difficult to quantify, such as pandemic and cyber. “The really exciting conversation is around the systemic risk piece. We are part of that conversation and if we can come up with sensible suggestions, which can be sold to government and that the insurance industry can get behind, I think we can have a really important role to play,” said Clementi.

“If the insurance industry runs away from systemic risk, it will cease to be relevant. The insurance industry plays a central role in society and the economy but it is good at excluding risk. If we keep bolting water-tight exclusions to policies and running for the hills, we will lose our relevance,” he said.

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