State-backed UK terrorism reinsurer Pool Reinsurance Co. Ltd. is "very confident" that its members will vote in favor of fundamental changes to how it is run.
The changes, which include shifting to catastrophe treaty-style reinsurance coverage from the current facultative model, are part of Pool Re's remit to return more risk to the private insurance market, which is a condition of its unlimited guarantee from the UK government. Pool Re is classified as an arms-length body of the UK Treasury department.
Pool Re members, which are insurers that write UK property cover, will vote on the changes on March 22. To move ahead with its plans, Pool Re needs 75% of the votes cast to be in favor. If members approve, there will be a one-year transition period before the changes go live in April 2025.
Failing to make its planned changes would lead to questions about Pool Re's ability to return risk to the private market and threaten government support.
"The government support for the scheme ... sits as a cornerstone for the group," CEO Tom Clementi said in an interview. "I think the members appreciate that."
Easing the transition
Pool Re reinsures the terrorism portion of property coverage in the UK. If claims exceed the pool's resources, built up from member premiums, the UK government foots the rest of the bill. The pool prices each risk individually; changing to a treaty model would have the group set prices based on the overall risk an insurer cedes to the pool.
Pool Re was established in 1993 after the private insurance market retreated from terrorism risk following a series of attacks in the UK. Since 2020, it has been classified as an arm's-length body of His Majesty's Treasury and part of the UK public sector. While the scheme's coverage scope has expanded over the years, the proposed changes would represent the biggest shift in how it operates since its formation.
Members' biggest concerns about the planned changes have been their effect on how much they would have to pay for cover and the risk they retain.
Initially, prices will only be able to rise as much as 10% or fall as much as 4%. This "corridor of stability" would widen in subsequent years as pricing shifts to be more reflective of the risk, Clementi said. Members would also be able to carry their existing risk retentions to the new model, though the plan is to increase retentions over time.
"Stability is the watchword" during the expected transition period, Clementi said.
The planned changes also allow members to set different retention levels for conventional attacks and chemical, biological, radiological and nuclear attacks.
Retro renewal
Pool Re has also been returning more risk to the private market by buying retrocession, which is reinsurance for reinsurers. It has £1 billion of conventional retrocession cover and a £100 million catastrophe bond. Both three-year covers are up for renewal in March 2025.
Clementi said Pool Re has decided to keep its conventional retrocession program in place for its third and final year instead of canceling and renewing. The purchase in 2022 was made at a "very opportune moment," Clementi said, and has protected the group from sharp price rises in the reinsurance and retrocession markets.
When renewal comes around, Pool Re will maintain its strategy of trying to buy as much reinsurance as possible within the bounds of value for money. Clementi said Pool Re is confident of attracting a lot of interest from retrocessionaires, "and we hope that we can attract at least as much capacity."
The Jan. 1 reinsurance renewal season was more orderly than the previous year, Clementi said, but the geopolitical environment had taken a turn for the worse in recent months, with the outbreak of the Israel-Hamas war and attacks on commercial shipping in the Red Sea. However, there is "no material change" to the terrorism threat landscape in the UK.
"The message we gave to reinsurers ... is there is a lot going on geopolitically, but that doesn't necessarily mean that the threat landscape here in the UK has changed," the Pool Re chief said.
The group also plans to issue a new catastrophe bond after its current one expires and is hoping to increase its size, Clementi said, "but we'll have to see what the investor appetite is at the time."
