By Ryan Hewlett

Feb 14 - (The Insurer) - Pool Re CEO Tom Clementi believes upcoming changes to the UK mutual’s member reinsurance scheme will force the industry to evolve, allowing insurers to properly underwrite terrorism in line with their own strategy and risk appetite.

• Clementi: 2025 a year of “modernisation” for Pool Re

• Members overwhelmingly backed treaty model shift in March 2024 vote

• Treaty transition to take effect from April 2025

• Shift to spur private market terrorism risk transfer

• Currently only ~4% of UK SMEs have terrorism cover

• 1.3 retro renewal expected to see limit expand to new record of 2.75 billion pounds

Speaking exclusively to The Insurer, Clementi said the mutual was now entering a “transformative” period of modernisation that will usher in a new period of maturity for the private market.

This transformation will initially see the transition of Pool Re's member reinsurance scheme transition from a facultative obligatory treaty to a catastrophe excess of loss (XoL) model, a move Clementi has previously described as the “most fundamental reform” to the terrorism mutual’s structure in its 30-year history.

The transition is set to take effect from 1 April 2025 after receiving overwhelming approval from members and HM Treasury in late March last year.

Clementi said the changes to the mutual’s reinsurance structure are just one part of a wider “theme of modernization” that is to take place over the first half of 2025. at state-backed Pool Re, which benefits from a sizable reserve fund of over 7.3 billion pounds ($8.9 billion).

“In terms of the public policy dials that we're moving, this new scheme will truly help to return more risk back to the private market and help to normalize the private terrorism insurance market in the UK,” he continued.

At present, members, which represent over 90% of UK property insurers, can lean on Pool Re’s tariff price to help determine the underlying premium passed on to policyholders. Under the new scheme that will not be possible as the change will see Pool Re charge members one price to reinsure their entire portfolio, forcing members to focus more rigorously on the underlying price adequacy of the risk they are assuming.

“It's forcing the industry to evolve and to start underwriting the peril as they would any other; they can now properly underwrite terrorism in line with their own strategy and risk appetite, and for the first time, they can also choose how much risk they want to retain,” explained the former MS Amlin CEO.

“It's giving members more flexibility around pricing, underwriting, and retention levels. We can now incentivize members to retain more risk by offering a cheaper treaty price if they do so, and with a new bifurcated retention structure, which splits terrorism between conventional and non-conventional forms, members can now choose a different retention level for conventional bomb-blast than for CBRN and cyber-terror perils. It’s firmly rooted in our first public policy objective to take risk off the public balance sheet and to normalize the market.”

Pool Re’s second objective is to drive up SME penetration of terrorism cover, and in so doing, enhance the economic resilience of the UK economy. To that end Pool Re is shortly to launch a market-wide consultation that will seek feedback on proposals that would involve handing members material price discounts on their SME portfolios.

There were 5.5 million SMEs in the UK in 2024, according to Parliamentary figures, representing over 99 percent of the business population and accounting for 60% of UK employment and 48% of business turnover. Despite this, SMEs remain the most vulnerable and non-resilient businesses as demonstrated during the COVID-19 pandemic.

Clementi says that the new scheme, which will charge members a single portfolio price, combined with the proposals on SME pricing should allow members to more easily reintegrate terrorism cover back into their standard property insurance policies, particularly for SMEs outside of peak zones, thereby driving higher insurance penetration.

“It should see more SMEs covered for terrorism without them even knowing that they're covered, let alone asking to be covered. What we know is that now, [only] about 4 percent of SMEs have terrorism cover and a lot more than 4 percent think they've got terrorism cover,” Clementi said.

“If we can get a number of our larger members to put terrorism cover back into their property insurance policies as standard then many more businesses are going to get claims paid out in the event of a loss and the UK economy will be that much more resilient.”

The consultation on SMEs is planned for the spring and Clementi is confident that Pool Re’s members – which range from general UK insurance heavyweights such as Aviva, Allianz, Axa, RSA and Zurich to smaller regional players such as Cornish Mutual – will opt to reintegrate terrorism cover into their standard property covers, just as was common practice before the provisional IRA’s bombing campaign led to a wholesale private market withdrawal and the formation of Pool Re in 1993.

“The idea that we are going to successfully sell standalone terrorism products to SMEs across the UK in the current economic climate particularly at the 'S' and the micro end – is for the birds. The only way that these policyholders are going to get coverage is if we can put some of these protections into a package,” he said.

“This is really going back to the future. It's a return to the position before the IRA’s mainland bombing campaign in the 1990’s, when terrorism was in property policies as part of the standard cover. There are reasons why it changed but we feel there probably isn’t a market failure in this space anymore and it’s time to now try to put that cover back in.”

In addition to the wider public policy objectives, Pool Re continues to provide a boost to public finances through the government’s 50% share of the pool’s gross premium and 25% of its annual surplus.

Under Pool Re’s HM Treasury retro agreement, 50% of GWP incepting during the year is payable as outward reinsurance premiums to government. This amounted to circa to 130.9 million pounds in the year ended 31 March 2024, down from 170 million pounds in 2023.

Clementi was speaking 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 toautomatically renew its XoL retro program for a third consecutive year, enabling the UK terrorism mutual to benefit from terms agreed in 2022.

The program – which is loss-free since inception – is now the industry’s largest terrorism pool reinsurance treaty, surpassing those of France’s Gareat and the Australian Reinsurance Pool Corporation.