Reinsurance: A form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer.
We provide terrorism insurance to insurers to enable them to transfer their risk to us, and so help them in their ability to withstand the financial burden when a large or unusual event occurs – we call this our scheme.
We are unusual because HM Government have provided unlimited backing to our scheme through a loan facility. reflected in an agreement between HMT and ourselves, known as the Retrocession Agreement. This governs the operation of the scheme and grants certain rights to HMT.
The Retrocession Agreement grants certain rights to HM Treasury and is reviewed by HM Treasury every four to five years to ensure it is still functioning as needed. Changes can be made to the scheme during these reviews.
How we operate as an organisation is indirectly limited by legislation, the 1993 Reinsurance (Acts of Terrorism) Act, and can be amended. HMT retains specific consent rights designed to ensure that nothing is done outside the intended scope of its guarantee.
Our activities are funded by premiums received from its Member insurers. Profit is not our objective; and surplus is invested via prudently managed investment funds and the use of other financial tools such as commercial retrocession and Insurance Linked Securities to enable us to meet future claims.
Definition of an Act of Terrorism
The scheme uses the definition of an Act of Terrorism contained in the Reinsurance (Acts of Terrorism) Act 1993
…acts of persons acting on behalf of, or in connection with, any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government in the United Kingdom or any other government de jure or de facto.
It should be noted that, whilst an event has to fall within this definition for an insurer to make recovery from Pool Re, the Member insurer’s policy wording may define an Act of Terrorism differently.
Insurance for terrorism damage under the scheme is always arranged through an insurer and never directly with us. The insurance may be restricted to physical damage to property or it may include business interruption losses resulting from property damage caused by an Act of Terrorism.
As most commercial property insurers are Members of Pool Re, any policyholder is very likely to find that their existing insurer can provide terrorism cover through the scheme. They simply need to contact their insurer or insurance adviser. Terrorism cover via Pool Re can only be provided alongside a property policy and not on a standalone basis.
Insurers in the scheme are free to decide the price of the terrorism cover they offer their customers. As a result, different insurers may give different quotes. Although it is open to each insurer to determine the price it charges, the most important factors tend to be the total value of the property, its location and whether the policy is to cover property damage only, or also business interruption losses.
Most insurers providing commercial property and consequential loss (usually referred to as business interruption) insurance in the UK are Members of Pool Re and have agreed to offer terrorism cover, as defined under the scheme, to any client or prospective client who requests it as part of the relevant commercial policy they issue.
The list of participating insurers is shown on our Members page. All the most significant providers of commercial property insurance in the UK take part, including many overseas companies and Lloyd’s syndicates.
On request by a policyholder, and assuming the eligibility criteria is met, an insurer participating in the Pool Re scheme will quote a premium for the inclusion of terrorism cover. If accepted, it will then become part of their commercial property (or other relevant) policy. Alternatively, the insurer may simply include terrorism cover within its standard policy without the need for separate consideration by the insured. The cover provided is for losses resulting from damage to property caused by an act or acts of terrorism. If the commercial insurance policy also includes business interruption, then terrorism cover can be provided for this risk. This cover may be provided as part of a commercial property policy or on a separate policy.
Any policyholder which has taken out this cover and sustains losses as a result of damage from an Act of Terrorism should contact their broker or insurer who will arrange for the claim to be considered under the usual procedures.
We have arrangements with all our Members to reimburse them the cost of claims they pay under the terrorism cover they provide, subject to a loss retention which the insurer must pay themselves. Insurers pay premium to us for this cover. The retention varies between insurers depending on the size of their terrorism insurance portfolio.
If losses ever became so large as to exhaust its reserves, we would draw funds from the UK Government to meet our obligations. We, in turn, pay a premium to the Government for this cover and would be required to repay any funds drawn down in this way from any future income.
It’s possible to cover most types of commercial property under the scheme: buildings, their contents, site property, construction projects and plant and machinery. It’s also possible to cover business interruption losses arising from damage to such property. However, the scheme does not cover property insured under marine, aviation or motor policies, nor does it cover, Nuclear Reactors or Nuclear Installations for which separate arrangements are in place.
The scheme centres on losses which follow from damage to commercial property, not extending to life or personal injury. Nor does the scheme protect private property, although it does cover residential property insured by a firm (such as a block of flats owned by a property company).
To be eligible for the scheme, the property must be located in England, Scotland or Wales; it does not apply to property in Northern Ireland, the Isle of Man or the Channel Islands. The property must normally be insured under a general commercial policy issued by a Pool Re Member that covers Fire and/or Explosion (as a minimum). Members do not provide terrorism cover under the scheme on a ‘stand-alone’ basis, i.e. in a policy covering terrorism only.
If a policyholder decides they wish to insure for Terrorism Cover, they must insure all eligible property for Terrorism Cover with a Member insurer, whether the property is insured under a single policy, or across many policies, and whether it is insured with one insurer, or across many insurers. They cannot use the scheme to insure only part of their property portfolio for terrorism. This is called the Adverse Selection or Cede All rule.