HM Treasury and Pool Re have backed formal proposals to transform the current terrorism backstop scheme to make way for a modernised aggregate catastrophe excess of loss treaty designed to ensure the scheme remains fit for purpose in the digital age.

Whilst there will be no changes to the fundamental rules of the scheme and the coverage provided, the proposal will allow members more flexibility to underwrite terrorism commercial property damage and business interruption risks in line with their strategic priorities and risk appetite.

Pool Re chief executive officer, Tom Clementi, said: “Members and HM Treasury have given Pool Re a very clear and exciting mandate to continue Pool Re’s modernising journey. When Pool Re was founded some 30 years ago, it was never intended to be a permanent, static and definitive solution. Our job was always to correct a market failure and to provide opportunities for the industry to take more terrorism risk onto its own balance sheet and normalise the market. The change to an aggregate catastrophe excess of loss treaty is the best possible outcome for both members and the taxpayer.”

Economic secretary to the Treasury Bim Afolami added: "Pool Re has worked hard on its plan to modernise its reinsurance offering and I am pleased that Pool Re’s proposals are supported by its members as well as the government. I look forward to seeing the impact of the change for members, customers and the terrorism insurance market.”

The proposals to convert reinsurance arrangements from the current facultative obligatory treaty to an annual aggregate catastrophe excess of loss treaty will take effect in April 2025.

A new treaty for the digital age (Source: Pool Re)

The shape and structure of the updated scheme is the result of more than two years’ engagement and consultation with members and HM Treasury.

Transformation from a facultative treaty to aggregate treaty basis will involve:

• More risk-reflective pricing: the updated scheme will provide members with reinsurance cover that is priced in a more sophisticated and risk-reflective way.

• Members’ reporting obligations will simplify, with members only required to provide an annual exposure return, reducing their administrative burden.

• Choice and flexibility built into the new treaty arrangements will allow members to choose their own preferred retention level, subject to a minimum retention specified by Pool Re and so take on more terrorism risk.

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