Pool Re issues £75 million terrorism reinsurance bond

Government backed terrorism reinsurer Pool Re has placed a £75m catastrophe bond, bringing new sources of capital to the terrorism risk market.

Issued through a special-purpose vehicle, Baltic PCC Ltd., the bond is the first-ever insurance-linked securities (ILS) contract to cover terrorism risk exclusively, and only the second to be issued under the UK’s new regulatory system for ILS.

The bond covers physical damage arising from terrorist attacks on an indemnity basis, including chemical, biological, radiological and nuclear attacks, as well as losses emanating from cyber attacks. The risk was modelled using Pool Re’s own model calibrated by Cranfield University using Computational Fluid Dynamics.

As a result of terrorist attacks in London and Manchester in 2017, business lost revenue due to restricted access to their premises. An amendment made earlier this month to the Counter-Terrorism and Border Security Bill 2018 allows Pool Re to cover losses incurred if a business cannot trade or is prevented from accessing its premises in the wake of a terrorist attack.

The amendment makes the UK’s terrorism reinsurance pool the first in the world to extend its cover to include non-damage business interruption losses.

Chief executive Julian Enoizi said Pool Re had been working towards this placement for several years.

“We are excited to bring an entirely new source of capital to the terrorism risk market for the first time. It diversifies the funding of our retrocession programme, complementing the capital of traditional reinsurers to spread terrorism risk even more broadly. In addition, it further protects HM Treasury, and helps us towards our ultimate goal of returning as much risk as possible to private markets.”

President of GC Securities, Shiv Kumar said the placement is an innovative win for Pool Re.

“Executing this successful placement whilst the ILS market is processing losses from 2017 and 2018, demonstrates the strength and quality of Pool Re’s proposition and their market-leading risk analysis. This type of innovation is a great example of the major role the UK market can play in broadening the ILS asset class.”

The three-year bond was placed by GC Securities and provides cover on an annual aggregate basis, carrying an initial interest spread of 5.9% pa.

Over its 25 year history, Pool Re has dealt with 16 separate certified terrorism claims totalling £635m (equivalent to £1.35bn when adjusted for inflation).