Pool Re places the world’s first-ever terrorism cat bond
Pool Re, Britain’s state-backed terrorism reinsurer, has broken new ground with its placement of a GBP £75 million catastrophe bond. Issued through a special-purpose vehicle, Baltic PCC Ltd., the bond is the first-ever insurance-linked securities (ILS) contract to cover terrorism risk exclusively, and only the second to be issued under the UK’s new regulatory system for ILS.
The bond provides £75 million of retrocession protection in excess of Pool Re Members’ net loss of £500 million. In so doing, it brings new sources of capital to the terrorism risk market, returns additional premium to the private sector, and moves UK taxpayers even further from the risks Pool Re mutualises on their behalf. GC Securities placed the three-year bond, which provides cover on an annual aggregate basis and carries an initial interest spread of 5.9% per annum.
Pool Re Chief Executive Julian Enoizi said: “We have been working towards this placement for several years and are excited to bring an entirely new source of capital to the terrorism risk market for the first time. It diversifies the funding of our retrocession programme, complementing the capital of traditional reinsurers to spread terrorism risk even more broadly. In addition, it further protects HM Treasury, and helps us towards our ultimate goal of returning as much risk as possible to private markets.”
The bond once again demonstrates Pool Re’s innovation and global leadership in this unique and evolving class of business. It covers physical damage arising from terrorist attacks on an indemnity basis, including chemical, biological, radiological, and nuclear attacks, as well as losses emanating from cyber trigger. The risk was modelled using Pool Re’s own model calibrated by Cranfield University using Computational Fluid Dynamics.
Shiv Kumar, President, GC Securities, commented: “Executing this successful placement whilst the ILS market is processing losses from 2017 and 2018, demonstrates the strength and quality of Pool Re’s proposition and their market-leading risk analysis. This type of innovation is a great example of the major role the UK market can play in broadening the ILS asset class.”
Katherine Coates, corporate partner at Clifford Chance and head of the firm’s Global Insurance Group, added: “We were delighted to advise Pool Re on this ground-breaking transaction, leveraging our extensive ILS expertise to date and strong working relationship with UK regulators, to ensure a positive outcome for all parties. The deal is another strong endorsement of the UK’s new ILS regime and closing it would not have been possible without the effective support of the PRA.”
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About Pool Re
Pool Re was formed in 1993 by the insurance industry 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 premium 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 12 February, 2019, Royal Assent was announced to an amendment of 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. 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. In Q1 2019, contingency cover from terrorist attacks was returned to the commercial market consistent with Pool Re’s strategy of ending market failure.