By Ryan Hewlett

Feb 10 - (The Insurer) - Upcoming changes which will see Pool Re’s reinsurance scheme transition to a catastrophe excess of loss (XoL) treaty model could spur the return of more risk to the private market, HM Treasury has said.

The move – set to take effect in April 2025 – received overwhelming approval from Pool Re members and HM Treasury in March 2024 following a long-running consultation launched by the state-backed terrorism reinsurer in August 2022.

The two primary aims of the reform were to help Pool Re return more risk to the private market and further distance the British taxpayer from losses, and secondly, to encourage members to add terrorism cover to primary property policies.

HM Treasury on Monday reiterated its support for the scheme and said the move could help keep UK businesses access affordable cover.

It noted that while the shift to treaty will not change the scheme’s fundamental rules or coverage, the overhaul will enable members to more flexible in their underwriting of terrorism commercial property damage and business interruption risks in line with strategic priorities and risk appetite.

“These changes will provide the opportunity for more of the financial risk arising from terrorism to be returned to the private market, while ensuring businesses are still able to access affordable terrorism insurance,” it said.

HM Treasury made the comments alongside publication of update Retrocession Agreement which sets out the contractual terms between Pool Re and HM Treasury.

This agreement – dated 14 January and now made public – comes into force on 1 April 2025, implementing changes agreed as part of HM Treasury’s 2022 strategic review of the Pool Re scheme.

The document, which runs to 186 pages, sets down the terms under which HM Treasury will act as retrocessionaire to retrocedent Pool Re. The UK terrorism mutual currently benefits from an unlimited state guarantee.

The government guarantee is triggered by a loss which exceeds Pool Re’s own private market retro cover. Pool Re’s own programme totalled £2.4bn when it last renewed in March 2022.

Since Pool Re – which benefits from an unlimited state guarantee – first began buying XoL reinsurance in the private market in 2015, it has pursued a strategy of acquiring as much limit as possible as part of its strategy of retaining as much risk as possible within the private market.

As a consequence, the Munich Re-led program is the largest terrorism pool reinsurance treaty in the industry, surpassing the £2bn+ limits purchased by France’s GAREAT and the Australian Reinsurance Pool Corporation $(ARPC)$.

Together with other assets including member retentions, alongside the ~£7.3bn of central reserves and the £2.4bn+ XoL policy, Pool Re has built a ~£12bn buffer to protect the UK taxpayer before the government guarantee is engaged.

“The Retrocedant has proposed that the Class A Reinsurance Agreements and the Class B Reinsurance Agreements be replaced by the Reinsurance Treaties with effect from 1 April 2025,” HM Treasury said in the document.

“The Parties have agreed to enter into this Retrocession Agreement to reflect certain amendments to the terms of the 2022 Retrocession Agreement to make necessary consequential changes to reflect such replacement and certain other changes agreed by the Parties.”

It comes as Pool Re continues to work towards the 1 March renewal of its Guy Carpenter-placed retro treaty. The Insurer revealed last year that Pool Re had again elected to automatically renew its XoL retro program for a third consecutive year, enabling the UK terrorism mutual to benefit from terms agreed in 2022.