Pool Re mindful of member concerns in treaty reinsurance shift, says CEO

➤ U.K. terrorism reinsurer Pool Re aims to roll out a new treaty reinsurance model in 2025, subject to member approval, bringing challenges for the pool and members alike.

➤ Pool Re wants to buy more retrocession as part of its government remit to return more risk to the private market, but may struggle in the short term because of market conditions.

➤ It is "imperative" that the insurance industry tackles hard-to-cover systemic risks as it will otherwise struggle to stay relevant.

Pool Reinsurance Co. Ltd., the U.K. government-backed terrorism reinsurer, plans to adopt a traditional catastrophe treaty reinsurance model in place of its current practice of setting a price for each risk — the biggest structural change since its formation in 1993 and a first for terrorism risk pools. The move will see Pool Re abandon its current rating system, where reinsurance is priced according to the risk zone the covered property sits in. It is part of the commitment Pool Re made to return more risk to the private market in exchange for the government maintaining the unlimited guarantee backing the scheme.

Just before the member consultation closed, S&P Global Market Intelligence caught up with Tom Clementi, who has run Pool Re since April 2022, to get his views on the benefits and challenges of the changes and how Pool Re can continue to stay relevant as the risk landscape evolves.

The following interview was edited for clarity and length.

S&P Global Market Intelligence: What is your members' appetite for retaining more terrorism risk, and does your agreement with the government include a target for member retention?

Tom Clementi: Some have the appetite to do more, and some are happy with the status quo. Therefore, we need, as we move to treaty, a framework that can accommodate both. In our proposals for a cat treaty model, which we would hope we could roll out in 2025 subject to stakeholder feedback, members will have more flexibility to determine the retention level that suits their own risk appetite, and we will price accordingly. At the moment, it's one rating matrix across the piece. The pricing at the moment doesn't really factor in the member retention.

There's no target around member retention. It's currently £250 million per event but likely to be £275 million next year. We want to take that up, and the whole rationale for doing that is it's a precondition of the [government] guarantee. Of course, we can return risk to the market through buying reinsurance, but the other obvious way is asking our members to take on a bit more. But we're also listening to members that may not want to.

How have members responded to the planned treaty reinsurance move?

I think members are broadly supportive of the direction of travel. They can understand the drivers that sit behind the changes. Everyone asks when there's change: What does this mean for me? What's treaty going to cost versus what I pay today? How much more capital will I need to hold if I'm retaining more risk and how much more profit am I going to make if I'm retaining more risk and therefore, hopefully more premium? We need to help them through that process.

A lot of those who have been members since the inception of the scheme quite like the way we do things because they've got very used to it. They've got quite wedded to our zonal rating matrix, and they quite like the fact it's uniform across the membership. One of the challenges for us is making sure that we can price each of the treaties appropriately but also fairly, and can retain some of that diversification credit that sits in the pool as a whole. We're probably asking members to do more because treaty will actually give them a lot more flexibility to price terrorism risk themselves, whereas at the moment, they can consult our zonal rating matrix. Members will need to think about how they resource that.

Finally, there may be some systems changes required in-house of the members. We don't underestimate the degree of change that's required here. Therefore, I want to make sure that members are given time to make changes, but that we also listen and we change course as appropriate.

Pool Re is covered in the private market by a £2.5 billion retrocession program and a £100 million catastrophe bond. What appetite does the private market have to take more of Pool Re's risk?

In line with our remit from [HM Treasury] to return risks, we'd like to buy as much retro and issue as big a cat bond as we reasonably can, subject to satisfactory pricing. [The current retrocession cover] is pretty much as much as we could get at a price that we're willing to pay, and similarly on the cat bond. There's appetite on our part to expand that over time, but we don't underestimate how challenging it would be to do that at this particular point in time, given what's going on in the market with Hurricane Ian, reports of trapped capital, and so forth.

As we improve the sophistication of the modeling, we increase levels of comfort within the capital markets and the retro market about the risk. The more they understand the threat, the more they understand the peril and the more assurance they can get with the modeling, the more likely they are to back us.

Pool Re has expanded its coverage over the years to include chemical, biological, nuclear and radiological attacks, cyber-triggered terrorism and non-damage business interruption. What else are you considering to ensure Pool Re remains relevant?

I think it's absolutely imperative that as an industry, we face into some of these hard-to-insure systemic perils, which aggregate very quickly and correlate very highly. If we fail to face into systemic risk and find ways of addressing it, in partnership with government and other stakeholders, we will really struggle for relevance in 10 or 15 years' time, and more importantly, will have missed an opportunity to re-bolster the resilience of the U.K.

The levels of uninsured exposure that exist in this country and elsewhere in relation to some of these systemic perils are pretty scary. Pool Re may or may not be a vehicle for doing that in the future. We're certainly very interested in systemic risk and in playing our part in addressing it.

There's a very important piece of legislation, which is likely to receive royal assent next year, called the Protect Duty, which will place a statutory obligation on owners and operators of publicly accessible locations to comply or adhere to certain sensible risk-mitigating initiatives. We could see that spawn much greater demand for employers' liability and public liability cover.

If there is an increase in demand for EL and PL as a result of Protect Duty, the question is whether the private market has sufficient capacity and appetite to meet that demand, and if it doesn't, whether there might be a role for Pool Re to play there on the liability side. That's something that we could look at doing.

Beyond liability, there are talks of pandemic and cyber. What role Pool Re can play, I don't know. But there's work to be done, particularly in terms of encouraging businesses around the U.K. to better understand the threat.