Pool ReinsuranceNewsletter

Spring 2016

Message from the Chief Executive2015 was an incredibly busy year for Pool Re, and it is one thatended on a challenging and defining note following the tragicevents that occurred in Paris. 2016 has begun in the same way.

Globally there are fourteen major terrorismreinsurance pools. Like Pool Re, theseprovide an essential backstop to protecttheir nations from the secondary effectsof terrorism and enable their economiesto get back on their feet.

At the invitation of Pool Re, these poolsgathered together in London for the Inaugural National Terrorism ReinsurancePools Congress in October. Little did weknow then just how tragically prescientthe gathering would be, particularly forour colleagues at GAREAT, the Frenchterrorism insurance pool and TRIP, theBelgian pool.

The Congress was an opportunity to formulate a pathway by which the insurance industry can once againevolve to better mitigate this seeminglyever changing threat. It was about thinking big, discussing global planningfor the management of terrorist threats,the idea of increasing the discount for buyers who undertake risk mitigationmeasures to increase penetration, and the emergence of cyber terrorism.

Clearly the tactics of terrorism are evolving. New ‘lone wolf’ attacks, suchas the gun attack on the Tunisian beach,or the attacks in Paris that spread acrossmultiple locations and included a varietyof crowded places, are difficult to predict, prevent or prepare for. Future attempted attacks will likely be differentagain, rather than simply mirroring thosebefore them.

Pool Re facilitates the provision of terrorism insurance in the UK. It also hasan implied obligation to promote resilient

cities. In this regard, particularly giventhe evolving threat of attacks on smallbusinesses, Pool Re has set about increasing the take-up of terrorism insurance by small businesses owners.To do so, it has introduced premium discounts of up to 40%.

Moreover, in June, in collaboration with the Office of Security and CounterTerrorism, we introduced a 2.5% discountfor businesses completing the CrowdedPlaces Risk Management Programmerun by the National Counter TerrorismSecurity Office.

The hard work is certainly not over andthe evolving nature of terrorism meansthat our work is ever more important. In November, the Chancellor announcedthat cyber now ranked alongside “guns,bombs and knives” as a terrorist weaponthat the UK needs to urgently defend itself against.

Pool Re currently exclude cyber-terrorismbut given the apparent blurring of the line between property and cyber, wehave engaged the Centre for risk Studiesat Cambridge Business School to buildour understanding of the cyber threat.

This will enable us to evaluate whetherthere are aspects of cyber-terrorism wemight cover in the future.

The hard work is certainly not over and the evolving nature of terrorism meansthat our work is ever moreimportant.

Julian EnoiziChief Executive

2 Five facts about Pool Re2 The evolving threat landscape3 Current scheme resilience4 Pool Re – what you need to know

Did you know?

The evolving threat landscape

1 Total insured value in Pool Reinsurance Scheme is £2.1 trillion

2 More than £250 billion of this is in the highly concentrated area of the City of London, CanaryWharf and the West End

3 We never refuse an eligible risk

4 We reinsure most of the UK’s major airports and railway stations,power stations and sites of criticalnational infrastructure

5 Nearly all of the major infrastructureprojects currently underway in the UK are protected by PoolReinsurance

The atrocities committed by Daesh haveprovided frequent tragic evidence of theevolution of the terrorist threat which weface. However, terrorism is not new a phenomenon to our shores. We have facedconsiderable challenges in the past whichour government, security services, insurersand industry have worked hard to tackle.What makes this threat any different? Why must we adopt a new approach tothat which has served us well in the past?

The actions of the Irish Republican army(IRA) prompted the establishment of PoolRe and, to a degree, its structure and the cover the scheme provides reflects that organisation’s method of attack. The principal focus of the IRA, at least on the UK mainland, was to cause massive,largely commercial, property damage.Daesh is committed to causing death and mass casualties. To them propertydamage supports, through the longer termeconomic damage it causes to a country’seconomy, but is not central to their aims.

IRA bombs were often accompanied by warnings to allow time for evacuation;Daesh seeks out crowded places to attackin an effort to wreak maximum civilian casualties. The IRA largely employed fertiliser bombs as their principal means of inflicting damage. Daesh’s arsenal is significantly more varied, including lonewolf attacks employing knives or automaticweapons, suicide bombers, groups of gunmen, chemical and potentially radiological IEDs, macro explosive devicesand the exploration of cyber as a means of disruption. Indeed, the limitations of itscapabilities are as yet unclear. The IRAaims were solely focused on the UK. Daesh has set itself a global agenda.

The threat we now face is more advanced,employs a greater variety of attack methodsand has an even more sinister ideology andoutlook. Our response must evolve andonce again reflect the nature of the threat.

Pool Re provides reinsurance cover for catastrophic terror attacks. However theshifting nature of the threat landscape hasmeant that we too have sought to adaptour proposition. The possibility that Daeshor Al Qaeda could employ a hitherto unseen attack method, such as a cyber or chemical attack, which causes significantproperty and business interruption damagemust become part of our consideration.

Today’s terrorist’s appetite for causingmass civilian casualties has also promptedan evolution of our scheme. Last year welaunched an initiative, in partnership withthe National Counter Terrorism Security Office which has the potential to drive a significant increase in the implementationof counter terrorism security measures inpublic and private buildings across the UK.

The genesis and development of the LossMitigation Credit initiative has, at its core,the goal of bolstering the UK’s defencesagainst an evolving terrorist threat. Its launchnot only provides a clear incentive for organisations across Great Britain to implement the risk management techniquesand develop the infrastructure that canhelp thwart terrorist attacks but also, in the event of an attack, protect lives andmaintain commerce.

That the threat presented by Daesh is not unique to our shores provided furtherimpetus for international collaboration. We are now working with our colleagues in terrorism reinsurance pools across theglobe to ensure that the extensive expertiseand experience housed within our own andother pools is shared and developed upon.

In summary, 2015 saw the expansion ofDaesh’s strategy to attack Western interestsand lifestyle targets well beyond Syria andIraq. Between March and December therewere eight major Daesh-related transnationalattacks, resulting in 620 fatalities. Our ownsecurity services have stated that sevenmajor radical extremist attacks were foiledon the UK mainland within the last year.

Of concern, has been the intelligence reports that Daesh is seeking to use bothchemical agents and radiological materialwithin Improvised Explosive Devices (IEDs)against Western targets. The employmentof chemical IEDs has become ever-morefrequent in the ongoing conflict in Syria andIraq, and the global rise of groups affiliatedto Daesh has also resulted in the proliferationof such tactics, demonstrated by the recent use of a chemical IED in Indonesia.Additionally, despite being written off by many commentators, the recent attackson the Grand Bassam beach resort in the Ivory Coast, and Western hotels in the capitals of Burkina Faso and Mali,demonstrates that Al Qaeda remains a significant threat actor, with ambitionsand capabilities stretching well beyond the remote regions of the Trans Sahel intothe wider African continent and beyond.

Looking forward, the first four months of 2016 have been equally violent: Daeshhave prosecuted a campaign againstWestern critical national infrastructure targets with significant economic consequences, as well as causing masscasualties. The impact on the Belgian GDP, post the attacks on Zaventem airportand Maelbeek Metro station, is yet to bedetermined. With increasing pressure beingapplied on Daesh strongholds in Iraq andSyria, the geographical spread of thegroup’s support base and lack of effectiveborder controls on the EU’s Eastern andSouthern frontiers, we assess that there will more rather than less attacks againstEurope and her strategic partners.

Five facts about Pool Re

Today’s terrorist’s appetite for causing mass civilian casualties has also promptedan evolution of our scheme.

Current scheme resilience

We recently renewed the external reinsurance programme we placed in2015. The placement achieves three key objectives:> Protects scheme assets in the event of a terrorist incident.

> Pushes the taxpayers further away from losses.

> For the first time since 1993, re-engagesmeaningful global reinsurance capacity in aggregated GB terrorism.

External capacity is now a key element of the scheme structure and the main features of the cover are:> We buy £1.95 billion excess of £500 million (increased from £1.8 billion in 2015), in two layers. The £500 millionattachment reflects dual need to provideliquidity for elements of ‘most likely’events, whilst remaining above the attritional level reinsurers would wish to avoid.

> 50% of the programme is placed withcarriers rated at S&P AA– or better.

> The placement is all on a three year deal,protecting us from extraneous factors.

> Cover under the placement mirrors thatprovided by Pool Reinsurance to ourMembers, and thus includes chemical,biological, radiological and nuclear events.

> The ‘lead’ market is Munich Re.> In excess of 75% is provided by Pool ReMembers themselves.

£0.5bn funds held on ourbehalf by HMT

£5.2bn Pool Re investment fund

£1.95bn commercial retrocession

£0.5bn Pool Re investment fund

£0.135bn market retention

Unlimited HMT drawdown

£8.285bn schem

e resilience ex HM

T

Pool Re and terrorism – what you need to know

4 The key element of the Pool Re definition is where it states: “influencing, by force or violence, of Her Majesty’s government…” Influencing government by force or violence encompasses all organisations who might do so. We have paid claims that remain either unclaimed by proscribed terrorist organisations, or were perpetrated by non-aligned groups.

5 Our definition also requires an act of terrorism to be “on behalf of or in connection with any organisation”.In the 2004 guidance note, HM Treasury stated that “the act in question needs to be related to the organisation. However an actwould not need to be carried out by a member of, or persons authorisedby, the organisation. The fact it was carried out by a sympathiser or cell acting independently of the organisations hierarchy would not exclude it from the definition”. This latter point is especially relevantin today’s terrorist environment where organisations like Daesh seekto inspire or influence others to do,instead of doing themselves.

6 Certifying an Act of Terrorism under the Pool Re scheme is a very clear and transparent process.If a Member considers a propertyclaim is an act of terrorism, theyprovide details to Pool Re and wemust ask HM Treasury to certify. If they do, we pay the claim(s). If they refuse, the Member can takeit to a tribunal that is binding on all parties, including government. If the tribunal certifies, again PoolRe deal with the event as terrorism;if they do not certify it is not an actof terrorism, then most, if not all of the property market would dealwith it as a property event, in theabsence of any other relevant exclusions.

7 Suggestions that wider cover than Pool Re is available due to a different definition should be examined very carefully. The key question for a broker or client to ask would be; would the incident really be excluded by the Pool Re definition and, giventhe terrorism cover sits alongsidethe property, if it is not certified as terrorism, wouldn’t it then be a property claim?

1 UK property policies exclude terrorism, but they do not excluderiot, strikes or civil commotion.Sabotage is only excluded if it is an act of terrorism too.

2 Pool Re Members only sell terrorismcover alongside property cover.Moreover, most Pool Re Membersuse the same, or very similar, language in excluding terrorismfrom the property as they do ingranting terrorism cover. This meanscover is back to back and is eitherproperty or terrorism. If it is not an act of terrorism then it should be a property claim.

3 The Pool Re (1993 Act) terrorismdefinition is different to the NMAdefinition adopted by some markets.In practice the difference betweenthe two is insignificant and the factPool Re’s definition does not makespecific reference to ‘political’, ‘religious’, ‘ideological’ or similarpurposes, does not mean we wouldtreat such events any differently. Indeed, in its 2004 guidance noteon how the 1993 definition mightbe applied, HM Treasury stated“the precise motive, or subject, on which influence is sought to bebrought to bear makes no difference.It could be political, ethnic, religious,cultural or anything else.”

Pool Reinsurance Company Limited5 Lloyd’s Avenue, London EC3N 3AE

This newsletter is published for general information only and should not be taken as constituting advice.

www.poolre.co.uk