73/02
23 July 2002
GOVERNMENT EXTENDS REMIT OF POOL RE
Ruth Kelly, Financial Secretary to the Treasury, today announced that the remit of Pool Re will be extended to enable insurers to offer terrorism insurance against a wider range of risks.
Today's package of measures has been drawn up by a government and industry working group set up to examine changes needed to Pool Re after September 11. The working group has reached agreement on the main changes needed, though the detail will be finalised over the coming months. The key changes are:
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Extension of Pool Re cover from ?fire and explosion? only, to an ?all risks basis?, for example enabling the scheme to cover contamination, impact by aircraft, or flood damage. These changes should be available in the next few weeks, and will be accompanied by a doubling in premium for the period covered, with an option to backdate to 1 January 2002.
And from 1 January 2003
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Changes to the financing of Pool Re to encourage competition.
- Changes to make governance arrangements more transparent in the public interest.
Ruth Kelly said:
?These changes will provide more certainty for the insurance industry and its customers, and put Pool Re on a more modern footing. This agreement is an excellent example of Government and Industry working in partnership.?
David Gamble, AIRMIC, added:
?The Government - industry working group has managed to produce that most difficult of results, a win-win situation for insurers, Government and insureds?.
Mary Francis, ABI said:
?September 11th highlighted new threats from terrorism which were not dealt with by existing arrangements through the Government-backed Pool Re. Pool Re is an outstanding example of the public and private sectors working together in the interests of customers. These changes will enable insurance companies to expand the cover they currently offer against acts of terrorism in the UK. The reforms are good for insurers and for our customers.?
Pool Re's Chief Executive, Steve Atkins, said:
?Pool Re welcomes the changes which the Government has announced. Taken together, they are a comprehensive response to the main difficulties faced by our Members in offering terrorism insurance for commercial property risks. They enable Pool Re to continue to play the fullest role in providing the reinsurance support needed by this sector of the insurance market ?.
Notes for editors
1. The Terms of Reference for the group's work were published in December. They group was asked to consider:
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Extending Pool Re to cover additional perils for commercial property damage, within existing legislative boundaries.
- The way Pool Re is financed. Issues to be addressed will include premium rates, thresholds for industry participation and ways of accessing commercially available terrorist insurance capacity. This will be with a view to encouraging competition in the insurance and reinsurance markets and protecting customer's interests.
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Considering other ways in which the public (including consumer and taxpayer) interest can be reflected in the Pool Re arrangements, in particular through the governance of Pool Re.
2. The Group did not discuss changes to the scheme which would require legislative change, such as changes to the definition of terrorism used by Pool Re, or extension to types of insurance other than commercial property damage and business interruption.
3. Pool Re was set up in 1993 to ensure that terrorism insurance would continue to be available, following withdrawal of insurers from provision of terrorism insurance for commercial property. HM Treasury is the ?reinsurer of last resort? for Pool Re, protecting it in the event that it exhausts all its financial resources following claim payments.
4. Cover provided by Pool Re will be extended to cover terrorist attacks which cause commercial property damage and consequent business interruption by ?all risks?. There will be no change to the existing exclusion for war risks, nor to the type of property covered by Pool Re. There will however be an exclusion in respect of hacking and virus damage to electronic components due to the likely inability to prove a virus was a terrorist attack. The extension in cover to all risks will be reflected in a doubling of the existing rating charged for Pool Re cover under existing Heads of Cover arrangements until the end of the year. The extended cover will be available in the next few weeks, with an option to backdate to 1 January 2002. An appropriate ?pro-rated? premium will be charged for the period on risk.
5. It is intended that the present exclusion which exists under the scheme for damage caused by nuclear devices will be deleted as soon as practicable, and by 1 January 2003 at the latest.
6. Pool Re currently operates a ?retention? under which insurers bear the first amount of any claims for an event covered by Pool Re. The current arrangements mean that the total cost borne by an individual insurer depends on the number of sections of their insurance policies affected by a terrorist event. From 1 January 2003 the maximum industry retention will be set at £30 million per event, with individual insurers? retentions being based on market share. This represents a moderate increase on retentions under the old basis.
7. The new basis for the retention will mean that each insurer will have its losses capped, both per event and per annum. Insurers will know in advance the maximum amount they could be called to pay out in any one year.
8. Over the next four years it is intended that the retention will increase steadily, bringing commercial reinsurance in to cover insurers? retentions or permitting insurers to retain this element of risk themselves. This increase will be phased in order to allow the market to get used to the new arrangements gradually, and to allow substantial time for the reinsurance market to re-establish terrorism capacity following September 11 2001.
9. Under the new arrangements from 1 January 2003, insurers will be free to set the premiums for underlying policies according to normal commercial arrangements.
10. Pool Re and HM Treasury have agreed that as part of the overall package of changes to Pool Re they will re-examine the detailed involvement of Treasury in day-to-day decisions. Under the new arrangements the Public Interest Director on the Board of Pool Re will provide a formal annual report to the Treasury on how Pool Re has performed against a set of objectives proposed by the working group . This will take effect from 1 January 2003.
11. A paper setting out the proposed changes in more detail is available on-line at this site. Media enquires should be directed to HM Treasury press office, tel. 020 7270 5238.