Firms better protected against terrorism: Royal Assent for bill allowing Pool Re to cover non-damage business interruption
Pool Re today welcomed Royal Assent being given to the Counter-Terrorism and Border Security Bill 2018 which will allow Pool Re to cover losses incurred if a business cannot trade or is prevented from accessing its premises in the wake of a terrorist attack. Before the law was changed, Pool Re could only reinsure losses incurred if a company’s premises had been physically damaged by terrorists.
The gap in insurance coverage was highlighted in the 2017 attacks on Manchester and London Bridge, where small and medium-sized businesses were shown to be particularly vulnerable with several caught behind police cordons or experiencing a reduction in footfall following the events. They suffered significant, and in some cases crippling, business interruption losses for which they could not be compensated, either because they had not purchased terrorism insurance, or because the cover excluded business interruption if their premises had not been damaged.
“Today’s amendment changes that,” said Pool Re’s Chief Executive, Julian Enoizi. “We have worked very closely with the government, and with the industry since it opted to mutualise the non-damage risk in 2017. Perhaps more importantly, we are already collaborating with business federations, local authorities, brokers and our Member insurers, all of whom need to have open conversations with their customers about just how much may depend on having this cover if the worst should happen.”
John Glen MP, Economic Secretary to the Treasury, added: “We will not allow terrorists to change our way of life. So when businesses raised their concerns about a gap in insurance cover following a terror attack, we worked with Pool Re to come up with a solution. Today, we’ve changed the law to give businesses peace of mind, helping them to insure themselves against financial loss as a result of a terrorist attack, even if there is no physical damage to their property. This means businesses will be able take out new and comprehensive policies to protect them in the future.”
The passing of the Bill marks a crucial development in UK financial resilience to the evolving patterns and methodologies of terrorism. Pool Re was set up in 1993 to protect businesses and the insurance industry from the impact of the IRA’s mainland bombing campaign, which targeted high-value infrastructure and prioritised economic disruption. Within its legislative limits, Pool Re has paid hundreds of millions in claims over its 25-year history at no cost to the taxpayer.
However, today’s terrorist threat to the UK is very different, with attacks here and across Europe since 2014 being more frequent and often less sophisticated. Although terrorists have targeted people indiscriminately, attacks have not necessarily resulted in physical damage to premises. This created a problem, given most terrorism schemes around the world were set up to primarily deal with damage to property.
Pool Re’s Chief Underwriting Officer, Steve Coates, added “It’s the sad reality that business-owners across the country now have a new set of perils that threaten their livelihoods. This amendment is a real turning-point for our industry’s ability to deliver the comprehensive protection businesses have been waiting for, but they’ve got to make the jump and buy the policy, and we have worked hard to make the new cover as accessible and affordable as possible. I would encourage any business owner to speak to their insurer or broker about what their current policy includes, and ensure it is extended to deal with terrorist threats.”
The amendment makes the UK’s terrorism reinsurance pool the first in the world to extend its cover to include non-damage business interruption losses.
“Our priority has been to keep this as far as possible a private market solution and so it will be reinsured by us via a new programme,” said Enoizi. “As we continue to identify and understand the protection gaps which emerge and bridge them through this unique public-private solution, we are focussing on helping the industry to grow by ensuring it becomes more comfortable with the exposure and thus reclaims more and more terrorism risk as we have seen recently with growing retentions and being able to cease contingency cover altogether.”
Notes to editors
The Counter-Terrorism and Border Security Bill 2018 includes amendments to the Reinsurance (Acts of Terrorism) Act 1993. It was this legislation which first established Pool Re, the government-backed terrorism reinsurance mutual.
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About Pool Re
Pool Re was formed in 1993 by the insurance industry in cooperation with the UK Government in the wake of the IRA bombing campaign on the UK mainland. Structured as a commercial reinsurer, Pool Re is a mutual whose member insurers comprise the vast majority of insurers and Lloyd’s Syndicates which offer commercial property insurance in Great Britain. Ceding their terrorism risk to Pool Re affords member customers a guarantee ensuring that they can provide cover for losses resulting from acts of terrorism, regardless of the scale of the claims.
Pool Re is recognised as a leading example of public/private partnership. It is owned by its Members but is underpinned by an HM Treasury commitment to support the company if ever it has insufficient funds to pay a legitimate claim. In return for that commitment, Pool Re pays a fee to Government and in addition, were it ever to use this support, it would repay the money over time from future premium receipts.
However, in the event of a loss resulting from an act of terrorism, each member cedant must first pay losses up to a threshold which is determined individually for that insurer. When losses exceed that threshold, the insurer can claim upon Pool Re’s reserves, which now stand at approximately £6.4 billion. These reserves have been accumulated by Pool Re since its inception. It is only in the event that these reserves and the company’s commercial reinsurance are exhausted, that Pool Re would require Government support.
Pool Re has evolved during the course of its history into a comprehensive ecosystem for reinsuring terrorism risk. Since April 2018, Pool Re has extended its cover to include material damage and direct business interruption caused by acts of terrorism using a cyber trigger. In addition, on 22 March, 2018, the Government announced its commitment to amend the 1993 Reinsurance (Acts of Terrorism) Act to enable Pool Re to extend its cover to include non-damage business interruption losses resulting from acts of terrorism, thereby closing a protection gap that had emerged. The amendment to the originating legislation, contained within the Counter Terrorism and Border Security Bill, will if passed ensure a comprehensive response from Pool Re to acts of terrorism in the UK. In both cases, Pool Re is the first of the global terrorism pools to overtly extend its cover to include these threats, demonstrating the strength of public/private partnership in disaster risk financing.
No longer a simple mechanism for providing compensation, today Pool Re partners with various academic institutions in order to better understand the threat of terrorism. In conjunction with its sponsoring of a Professor of Terrorism Risk Mitigation at Cranfield University, Pool Re’s research and analytics department provides threat analysis and modelling to insurers so as to stimulate the commercial insurance market by enabling it to understand, asses and ultimately price terrorism risk with a view to assuming more of that risk over time.
Pool Re also works to increase economic resilience by, for example, providing incentives in the form of premium reductions for end customers who implement protective security measures accredited by the government.
Pool Re is a founding member of the International Forum of Terrorism Risk (Re)Insurance Pools (IFTRIP). Established in 2016, IFTRIP is aimed at fostering closer ties and allowing for greater collaboration between the world’s terrorism disaster risk financing mechanisms. IFTRIP is comprised of national terrorism risk entities from thirteen countries.
Over its 25-year history, Pool Re has dealt with 16 separate certified terrorism claims totalling £635m (equivalent to £1.35bn when adjusted for inflation). Since March 2015, Pool Re’s financial resilience has been augmented by a commercial reinsurance placement. This re-engages the global market in aggregated UK terrorism risk for the first time since 1993, and additionally provides protection to Pool Re’s assets whilst distancing the UK taxpayer further from loss. Pool Re continues to explore the goal of market normalisation by, for example, exploring the possibility of a ground-breaking ILS placement to complement its commercial retrocession and enhance its capital structure. Moreover in Q1 2019, contingency cover from terrorist attacks was returned to the commercial market consistent with Pool Re’s strategy of ending market failure.