The Pool Re scheme has been set up by the insurance industry in co-operation with the UK government so that insurers can continue to cover losses resulting from damage caused by acts of terrorism to commercial property in Great Britain.
Insurers that participate in the scheme offer terrorism cover as part of the relevant commercial policies they issue when their policyholders request them to do so. Each insurer must pay losses up to a threshold, which is determined individually for that insurer. When losses exceed that threshold, the insurer can claim upon reserves accumulated by the insurance industry on a mutual basis within a separate company, Pool Reinsurance Company Limited (“Pool Re”). Should terrorism claims exceed these reserves, Pool Re can, in turn, draw funds from government to enable it to meet its obligations in full, regardless of the scale of losses.
Pool Reinsurance Company Limited was formed in 1993 following a series of terrorism incidents in the early 1990’s in London and elsewhere in England related to the situation in Northern Ireland at that time. The cost of these losses caused insurers and reinsurers to focus on the difficulties of providing terrorism cover for commercial properties, in particular the high potential cost of losses and the lack of any reliable method of estimating what the future loss experience might be. Insurers depended on reinsurers for financial protection should very large claims occur and, accordingly, both insurers and reinsurers decided they could no longer provide terrorism cover using traditional methods.
Yet, any withdrawal of terrorism insurance that left areas of business unprotected would potentially have had serious consequences for the UK economy. It became necessary, therefore, to devise a new mechanism for providing this type of cover, without leaving insurers or reinsurers open to substantial losses for which there was no reliable method of calculating accurate premiums.
During the latter part of 1992 it became clear that any new scheme would require the joint involvement of the insurance industry and government. Following extensive dialogue, a suitable structure emerged and the details of the Pool Re scheme were developed.
The Pool Re scheme began operations in 1993 and has subsequently been involved in claims arising from thirteen separate terrorism incidents covering losses of over £600m.
Since its start, the scheme has adapted to changing circumstances in the insurance market. The most significant changes occurred after the attacks in America on September 11th 2001, which caused insurers and reinsurers to reconsider the way terrorism insurance should be offered.
Until that date the conventional insurance and reinsurance market had been willing to dovetail the cover they provided with that available from the Pool Re scheme. Pool Re’s cover to insurers was restricted to damage caused by acts involving fire or explosion, and the international reinsurance market covered other types of terrorism. After 9/11, however, reinsurers were no longer in a position to do so.
Had Pool Re continued with these restrictions, insurers would have been unable to provide their customers with cover for terrorist events not involving fire or explosion. In an attempt to avoid this situation, there were discussions between representatives of the insurance industry, buyers of insurance, the UK government, Pool Re and others.
In July 2002 an agreement was reached to widen cover and amend certain other features of the scheme in a way that responded to these changing needs. In particular, Pool Re’s cover was extended to an “all risks” basis, and no longer restricted to fire or explosion. In addition, exclusions relating to chemical, biological, radiological or nuclear attack were removed.