Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

The role of Pool Reinsurance Company Ltd(A private company with a public policy objective)

Presentation to the Advisory Committee on Risk Sharing MechanismWashington, 9th June, 2017 
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Background to Pool Re

 Pool Re was established in 1993 by the insurance industry acting in partnership with the UK Gove Formation due to inability to obtain reasonable commercial property cover for prevailing terro

mainstream insurance markets

 Operates at nil cost to the taxpayer as a private industry mutual supported by a Government guara

in the event of use)

 Reinsures assets to the value of £2.2Trn Largest claim paid to date (Bishopsgate Bombing in the City of London in 1993) amounted to £26

today would be in excess of £1bn due to increased property density and values

 Pool Re has to date dealt with 13 certified claim events costing £635m*

– 8 claims accounting for 95% of losses occurred between 1993 and 1996– The relatively small claim payments from the 7/7 bombings highlights the terrorism insuranc

later

– There are currently five active claim notifications arising from the events at Westminster on 

and many more from the event in Manchester on 22 May, 2017 (see slide 7)

 Governance is via a Board of Directors comprised principally of insurance industry representatives* This figure would be significantly higher if the same events were to occur today
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Economics 

 Pool Re operates a pre-funding model – there is currently a £9bn+ buffer

before the requirement to drawdown funds from HM Treasury*

 The capital stack operates as follows:

– Each insurer must pay losses up to a threshold, determined

individually for that insurer, equating to an industry retention perevent and in the aggregate

– When losses exceed that threshold the insurer can claim upon the

reserves accumulated by the insurance industry on a mutual basiswithin Pool Re

– An additional layer of protection is provided by a commercial

retrocession arrangement, purchased by Pool Re since 1 March 2015(first time the commercial market has participated in terrorismreinsurance in the UK for 23 years)

– Should claims exceed all layers described above then Pool Re can

draw funds from the Government to enable it to meet its obligations infull, regardless of the scale of losses

 Pool Re charges insurers a premium for the reinsurance cover provided;

in turn 50% of these premiums are passed on to HM Treasury forproviding the Government guarantee and further payment is made for thecommercial retrocession; annual profits in Pool Re (if any) are distributed25% to HM Treasury and 25% to Members

 For the 2015 financial year, £154m in premiums and an additional

£33.5m share of surplus is payable to HM Treasury; this is expected toincrease for 2016

 It is the intention over time to encourage greater insurance industry risk

participation - through increased market retention, involvement inadditional retrocession and/or similar arrangements (e.g. Insurancelinked securities) and potentially by segmenting the risk

Current capital structure 

Pool Re investment fund

Market retention

Commercial retrocession

HMT drawdown

£££u£

Pool Re investment fund 

HMT Hypothecated Fund £

* Excludes any increased premium receip

split post event; any money drawn from repaid from future premium receipts
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Proposition 

 Pool Re provides reinsurance cover for damage to commercial property caused by a terrorist event; the nature of the c

over time in response to the evolving terrorism risk landscape

– Initially Fire & Explosion– Cover was changed to ‘All-Risks’ with two exclusions - War and Electronic (Cyber); CBRN no longer excluded

 The traditional approach to terrorism (focused on property damage and related business interruption) has however n

the evolving nature of the threat (focusing primarily on achieving propaganda of the deed by murdering individuals); agaps have emerged in the terrorism insurance market

Changes to the terrorism landscape

Domestic terrorismMethod of attack: Large vehicle bombs (LVBIED)Intent: Economic disruption (discriminate targeting)Risk transfer needs: Property damage and BIIslamist extremism Method of attack: MTFA / PBIED / VBIED / CBRN / CyberIntent: Mass casualties (indiscriminate targeting) Risk transfer needs: Property damage, BI, loss of attraction, nonproperty damage BI, cyber, impacts on people and damage to brand and reputation 

15:00

Changing nature of terrorism threat
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Pool Re’s evolving role as a Public Private Partnership (PPP)

 Originally formed in response to the spate of terrorist attacks related to the situation in Norther

time. As the IRA threat reduced, terrorism nevertheless went from being a localised issue to beinpost 9/11

 In 2015, as a result of the conclusion of negotiations regarding the terms and conditions of Gov

and a major strategy review, there was a significant shift in the premium allocated to Governmenmodernisation of the scheme

 As a result, we introduced a number of modernisation initiatives; these initiatives sought to bring 

into the present day in the context of significant changes in both the macro, and the inenvironments

 We have now started introducing a series of changes, wider in scope and more far reaching, s

from passive fund/mechanism to a proactive buffer organisation engaged in resilience building. (see next slide) will define the evolution of Pool Re over the coming years and towards the nreview of its involvement in terrorism insurance starting in mid-2020

 Our goal at the next Government review is that HM Treasury, rather than adopting a narrow 

account of broader national security issues and the role that Pool Re can play in these. We aim to by engaging in dialogue across Government

1993

Pool Re scheme created

1998

Good Friday Agreement

2003

Coverage widened to ‘All Risks’, including CBRN (as a result of 9/11),Electronic risks excluded (Cyber)

2014

Negotiations with HMT over premium cede as well as modernisation of the scheme

2015

Modernisation of Pool Re scheme (SME proposition, purchase of commercial retrocession and PSIA)

P- - - - - - 
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Modernisations to the scheme

Pool Re 

modernisation 

initiatives

External reinsurance

 

Dividend

 Payment of a 25% 

dividend

 Increased investment in 

risk mitigation measures

Risk reflective rates

SME 

proposition

Underwriting amendments

Investment class widening

Updating of exclusion

Member 

Retention

Terrorism Research & 

Analysis Cell

International 

Collaboration

 Ability to alte

reflective

 Modelling Me

to establish tposition betw

 Simplified terrorism 

product set to businesses with assets <£2m

 Changes to und

regarding deducmanagement crfor loss limits

 Allow Members 

 Investment in a broader range of 

asset classes to diversify risk and help maintain the real value of the fund

 Increased to £150 

million per event and £300 million per year

 Update the cyber exclusion Move to cover physical damage 

as a result of remote digital interference

 Created to provide high-end 

focused intelligence and data on the contemporary threat environment to Members and the wider market

 Founding member of the 

International Forum of Terrorism Risk (Re)Insurance Pools (IFTRIP) with 14 other catastrophe pools

Since 2015 Pool Re has implemented a number of modernisation initiatives, a selection of whibelow:
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Pool Re Objectives

• Reduce market failure. The scheme should only cover risk which the market could not or would not cove• Incentivise the market to take as much risk as it can cope with• Return more pricing control to the market• Ensure that there is the widest possible cover for UK plc• Adapt the scheme to the changing nature of the threat and loss• Mitigate risk to the taxpayer. The scheme should keep the taxpayer as far away as possible from risk an• Provide a fair basis of compensation, broadly related to the risk take by different parties.
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

The potential of the Pool Re model

 Pool Re is an example of an effective market-oriented collaboration between the public and privat

– It promotes financial resilience within the UK economy, providing UK Plc with continued acce

terrorism insurance cover as well as influencing mitigating behaviour

– It is the vehicle through which premium is collected from the market and claims paid out, ove

significant buffer between potential loss events and the UK taxpayer

– It brings government agencies, academia and the industry together to promote greater und

risk and develop the product as the risk evolves, as well as facilitating the re-emergence oterrorism reinsurance market

– It benefits from a government guarantee in order to do so

 We intend to continue to develop as an organisation – developing our economic model to maxim

stakeholders, evolving our proposition in line with the nature of the threat and positioning ourseterrorism expert

 We aim to become a blueprint for a successful public/private partnership that can potentially be 

situations where significant risk is currently sitting on the Government balance sheet – e.g. non Terrorism exposures, Foreign Aid (DFID), Cyber, Pandemic and Climate Change

 By way of example, in the area of Strike, Riot and Civil Commotion, in the event of serious rio

property damage and business interruption, police authorities will be liable to pay compensatioCompensation Act 2016. If there were to be a funding gap, police forces may need to be ‘bailegovernment. A government endorsed ‘risk pooling scheme’, with private market reinsurance slosses, could address this ‘gap’ without additional central government funding
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Pool Re - Harnessing the private market

• We buy as much retrocession as we can - £2bn• Government is compensated for their guarantee• Government also shares in the surplus• Over time Government layer being pushed ever higher – taxpayer protected.• Scheme is balanced. Private market provide working layers of cover, but are not exposed to the systemi

destroy them

• Cover remains ‘back to back’ with property – important. 
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Pool Re’s Focus – Adding value to HMG

Terrorism Insurance Gaps: We are currently focusing on bridging terrorism insurance gaps in the following areas:

– Cyber – knowledge and awareness around cyber threats and attack vectors has changed enormously in recen

capability of hackers. This is currently an excluded peril

– Non damage Business Interruption (BI) – total BI from the recent Paris attacks could reach US$12bn even 

damage was negligible, leading to questions over the efficacy of the French Pool and Terrorism Pools in general

– Losses in these areas are NOT currently covered by the insurance market or Pool Re and could therefore result 

France by way of example, the French state has been forced to raise taxes on insurance policies following three resulted in no pay out from the French Pool

– The events at Westminster are an illustration of this since the claim notifications relate to non-damage BI, not c

either Pool Re or the private market. Discussions o this with HMT have been halted due to the General Election

– In addition to the above gaps, the SME segment and exposures outside London remain underpenetrated, with 

increased vulnerability in the event of a terrorist attack

Risk Mitigation: In collaboration with the National Counter Terrorism Security Office (NaCTSO), Pool Re introduced Loss Miti

Protective Security Improvement Activity (PSIA) initiatives. This has the potential to improve resilience by driving a in the implementation of counter terrorism security measures in public and private buildings across the UK. We arOSCT/NaCTSO to explore widening of the scope

 Opportunity to drive compliance with Cyber Essentials, ISO 27001 once scope of cover is extended to Cyber Terrorism

 Potential future activities to include involvement in information dissemination (e.g. National Counter Terrorism A

launch of new product

 Sponsor a Professor of Terrorism Risk Management and Resilience at Cranfield University
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE 

Expertise: As the terrorism threat landscape changes, Pool Re has begun to

leverage its expertise to become a global thought leader, setting up theTerrorism Risk & Analysis Centre to coordinate all research/knowledgebased activities and produce regular Threat & Mitigation Reports for ourMembers and our clients in the wider business community so as toenable better assessment and pricing of risk

 Provide analytical support to the OSCT, as part of the refresh of

CONTEST:

– Project Dulverton - (how the (re)insurance sector might support UK

interests in fragile states)

– Engaged in wider discussion within the private sector about how to

close the terrorism “Information Gap” between HMG and

businesses - Pool Re (along with other recognised counter terrorismentities) could potentially have a significant role to play (ProjectSIDE - Security Information and Data Exchange)

 Ongoing external projects on CBRN exposure modelling (Project

Nighthawk with Cranfield University) and cyber-terrorism with the

Judge Business School, Cambridge University

Enhancing our model: Participating in a research study led by Cass Business School, City

University London) titled State-sponsored pools as centres of expertisein the changing market for risk will determine if our model can be aneffective one for removing liability from the Government’s balance sheet

Pool Re’s Terrorism Risk & A

Objective

Workstreams

• Equip Pool Re to better understand the terro

research, to better inform our decisions

• Generate “value add / thought leadership” 

Members, partners, and other stakeholders renvironment

Export Pool Re’s PPP knowledge to mar

pools are being investigated as a risk finLead thinking on how terrorism risk shou

• Enhance relationship with HMG and those 

Counter Terrorism policy development

• Lead on risk management solutions for, a

insureds and delivery partners thereby mitigaultimately, the Government

12

3

4

• Develop capability to provide innovative 

emerging risks and help to drive nation

KEY OUTCOMES: 

• Establish a brand as the ‘go-to organis

complex issues in the terrorism insura

2

1

• To position Pool Re as a global expert in te

• Provide terrorism information/data to un

information gap between HMG and th

3

Pool Re’s Focus (continued)
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

Pool Re’s Focus (continued)

Supporting Government initiatives: Pool Re has driven its agenda in the absence of specific policy guidance

from HMG but now seeks enhanced collaboration with the Home Officein particular

 Pool Re is looking to engage more closely with its stakeholders to align

strategic thinking and drive consensus, and has been activelyinvolved in a number of collaborations in addition to those described inprevious slides

– Organised a joint Home Office/Pool Re event (re. CONTEST) in

July 2016

– Seconded an employee to the Home Office (OSCT) to assist with

the proposed working groups aimed at bringing together the privatesector, the third sector, Government and Government agencies tofacilitate the private sector's role in counter-terrorism by enabling

two way communications

– Attended the first meeting of a cross departmental Insurance Task

Force in September , chaired by DfID with other key departmentsand agencies including Treasury and FCO

– Assisting a Home Office/FCO initiative on how insurance can help

protect British interests abroad

International: Pool Re has been the driving force behind closer collaboration between

international terrorism pools

– Hosted the first National Terrorism Pools Congress in October 2015;

the second annual congress was held in Canberra the following year

– The International Forum of Terrorism Risk (Re)Insurance Pools

(IFTRIP) ratified in October 2016, conceived as an independent

working group serving as a discussion body for issues relevant toany kind of state-backed terrorism (re)insurance solution providers,and as a forum for the discussion of relevant developments in the(re)insurance industry

Stakeholder engage
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

We analysed a broad range of international schemes to undpros and cons of various models and potential learnings fo

Terrorism Other

Terrorism 

and other 

coverage

Other (Re)insurance (inc. public/private partnerships)

Earthquake Flood

N. Ireland

Earthquake Riots Flood

(Inc. war and hostile actions) 

(Inc. war and political violence) 

(Inc. fire and natural events) 

Earthquake

Sovereign 

wealth funds

Scheme examples – terrorism and others Shortlisted schemes for d

Lloyd’s Central Fund

Offers terrorism Large Risks (≥ 

Medium Risks 

123

456 Most compreh

provided by St

123

Privately fundenon-profit provCalifornia, a h

Public earthquclaims history learnings

Pension 

protection

Private pool adState owned rmarketState owned gprovides unlimGAREAT

TRIPRA offers largest insuranmechanism TRIPRA

(Inc. political violence) 

(Inc. extraordinary 

risks)
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE

There are interesting elements in each model that Pool Re cfrom and potentially apply in the UK in the pursuit of the opmodel

Private schemes

Pre-Funded public/private 

partnerships

Pre-Funded 

public/private 

partnerships

Perils coveredGovernment guaranteeMandatory to offerReserve buffer and reinsuranceActive involvement in response effortsMandatory to coverActive involvement in prevention efforts

Earthquake 

pool in New 

Zealand

Earthquake 

cover for 

residential 

properties

Unlimited

With fire cover

Public 

schemes

Consorcio: 

catastrophe risk 

pool in Spain

Terrorism, 

including 

CBRN, plus 

other perils

Unlimited

India terrorism 

pool

Only 

conventional 

terrorism

GAREAT & 

CCR: terrorism 

pool in France 

Terrorism, 

including some 

CBRN, plus 

other perils

Unlimited

With fire cover

*CCR only

California 

Earthquake 

Authority

Earthquake 

cover for 

residential 

properties

California 

Earthquake 

Authority

Terrorism, 

potentially 

including 

CBRN

Limited

TRIPRA: terrorism 

scheme in the 

USA
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE 

Pool Re adds value by: Pool Re is an example of an effective market-orientated collaboration between the public and 

 It has been approached by a sub-committee of the 5 eyes as well as countries considering a ter

a view to how to establish a pool and incentivise resilience measures

 It promotes financial resilience within the UK economy, by providing UK Plc with conti

appropriate terrorism insurance cover and by encouraging businesses to implement governmenmanagement strategies (PSIA and Cyber Essentials)

 It is the vehicle through which premium is collected from the market and claims paid out, over 

significant buffer between potential loss events and the UK taxpayer

 It acts as a framework facilitating the ongoing and increasing involvement of the insuran

terrorism insurance in the UK

 It has to date operated at nil cost to the tax payer, paying the Government around £200m per an

 It helps to facilitate the flow of information between the government and the private sector (SIDE

 It acts as a think tank for ways in which to mitigate new forms of risk (British interests ab

Insurance Gap)

 It is an incubator of new ideas (Pool Re Chair of Terrorism Risk Mitigation and Resilience at Cran

 It is a model for cooperation in risk management globally (IFTRIP and a potential Insurance L

solution as per the recent Bank of England and Financial Services Bill)

Currently
Pool Reinsurance Company Limited, 5 Lloyd’s Avenue, London EC3N 3AE 

It could, however, be used further: We intend to continue to move forward as an organisation – developing our economic model to m

our stakeholders, evolving our proposition in line with the nature of the threat thereby closing gapositioning ourselves as the leading global expert in terrorism insurance and reinsurance

 We also aim to provide a blueprint for a successful public/private partnership:

– To propose innovative ways to remove risk from the government’s balance sheet (Civil Injurie

Scheme, strike riot and civil commotion by way of example)

– As a model for other “uninsurable” perils that threaten society and where partnership betw

academia and the private sector could yield world leading ideas (cyber, climate change, pandem

– To promote behavioural change by developing a private sector version of the PSIA concept be

crowded places solution thereby ensuring broader take-up and therefore resilience

– To help ensure that the London Insurance Market post-Brexit remains world leading with 

Terrorism Bond

– To back other Home Office initiatives

Looking Forward