When the private insurance market buckled under the threat of terrorism in the 1990s, the UK government stepped in with the creation of a reinsurer focused on terror risks.
Located in the heart of the City, this company, Pool Re is backed by HM Treasury and was established when the insurance sector reduced its terrorism exposure following the IRA bombings in the UK during The Troubles.
“It was the Baltic Exchange bomb in April 1992, which was a day after John Major’s Election victory, which was the straw that broke the camel’s back,” explained Pool Re CEO Tom Clementi.
The private market withdrew its capacity for terrorism because losses were coming thick and fast.
“John Major’s government determined that it couldn’t afford to leave the UK economy unprotected against this peril that it was seeing on the streets of London and Manchester and elsewhere,” Clementi explained.
He added: “So the government and the insurance industry came together and joined forces to address a risk which neither could really address unilaterally satisfactorily.”
Pool Re’s birth
Pool Reinsurance Company Limited (Pool Re) was established in 1993 as the first public-private partnership to cover insured losses caused by acts of terrorism. The scheme is backed by an unlimited guarantee from HM Treasury, which allows it to provide unlimited terrorism cover to the UK insurance industry.
Pool Re CEO Tom Clementi
The reinsurer comprises 100 members, primarily commercial insurers and Lloyd’s syndicates, including AIG and AXA, all of which provide property insurance in the UK. Each member retains a portion of the risk before transferring it to the pool, which collectively covers approximately £450m in risk.
Pool Re provides unlimited cover, including CBRN (chemical, biological, radiological, and nuclear) events, and has evolved its cover to include non-damage business interruption and digital interference.
The reinsurer collects premiums from its members on an annual basis. “Over the course of the last 32 years, it has enabled us to build up a pool, and that fund is now £7.3bn,” Clementi explained.
“We supplement that £7.3bn fund by buying reinsurance ourselves and by issuing a [£100m] terrorism catastrophe bond into the capital market. When you add on the [£2.75bn] reinsurance programme that we buy and the cap bond we issue into the capital markets, we actually have a private capital stack of close to £13bn,” he added.
Pool Re pays the UK government 50 per cent of its annual premiums and 25 per cent of any profit it makes, including earnings from its investment portfolios.
Clementi added: “Over the last 10 years, we have paid north of £2bn to the Treasury for the backstop that they provide to the scheme.”
Following a review, Pool Re was reclassified as an arm’s-length body of the Treasury, which as a result, determines when the scheme will pay out.
The reinsurer has paid out over £1.25bn in claims related to 17 terrorist events since its creation.
The last time the reinsurance paid out was for the Manchester Arena attack in May 2017, which killed 22 people and injured over 1,000 as a result of a terrorist attack at an Ariana Grande concert.
“The legacy of Pool Re, since we were created because of that market failure back in the 90s, is that we’ve built this private sector buffer which distances the government and the taxpayer from the financial implications of terrorism,” Clementi explained.
“It would take essentially a £13bn pound loss event before the government would have to step in and use taxpayers’ funds to pay losses, whereas back in 1992 when we had that market failure, the government was a ground-up insurer.”
“It’s enabled a private market to be built and to flourish so the taxpayer has been removed from the frame,” he added.
‘Prevention is cheaper than cure’
Like many risk managers in the insurance industry, utilising internal knowledge to offer other products is a key component in expanding a business’s portfolio.
Pool Re is no exception. Within the business sits Pool Re Solutions, an in-house team that, along with keeping tabs on global events and pricing, uses its solutions to help companies to understand terrorism and related risks.
Clementi highlighted: “The team goes out to some of those high-profile venues around the country to help them really understand credible terrorism scenarios they would likely face and to help them quantify that in pounds, shillings, and pence.”
“We’ll do a threat and vulnerability risk assessment for them, and then what we call a probable maximum loss (PML) exercise to help them understand what a scenario could mean for them in terms of monetary impact, to help inform their risk management approach and how much insurance they might want to buy,” he added.
The reinsurer also utilises some of the £7.3bn fund to invest in national resilience initiatives alongside the government.
Years ago, Pool Re established the Counter-Terrorism Alliance in collaboration with the Home Office and the counter-terrorism police, and uses a small portion of that fund each year to support initiatives through the scheme.
“We funded some initiatives that are helping the police enhance their counter-drone capability. We’re also helping the Home Office with biometric data capture of people coming into the country illegally,”
He explained: “We can capture biometric data and then wash it through databases to see whether any of those illegal immigrants have previous convictions in places like Iraq and Afghanistan for terrorism.”
Pool Re is also permitted to utilise some of its funds to invest in the National Security Strategic Investment Fund.
This venture capital fund primarily invests in startup companies, predominantly in the UK, in the defence and security sector. Pool Re has committed over £200m to the National Security Strategic Investment Fund, to “try and make the country more resilient”.
A Blueprint private-public collab
In June, the National Security Strategy published a report that called for a whole-of-society approach to national resilience. The report emphasised the need to strengthen the country and enhance its ability to withstand future shocks—a responsibility that extends to businesses.
This announcement came ahead of a Strategic Defence Review in July, which is expected to promote a shift toward “warfighting readiness” to deter potential aggressors and reinforce the UK’s overall defence posture.
Clementi argued that these developments are a call to action for corporate Britain, noting that “this is not something where we can rely solely on the government.”
“The threats are that much more serious and much more unpredictable. There is a really important role for the private sector to play in helping bolster national resilience,” he added.
Clementi also noted that Pool Re’s model offers a compelling “blueprint” for how government and the private sector can work together to strengthen national resilience.