Willis Sees No Impact on Coverage from UK’s Pool Re Rate Increases

December 15, 2014

The announcement by the UK government that it planned to raise premium rates for its ultimate backup reinsurer Pool Re initially raised fears that coverage through the system could be diminished.

Willis noted, however, that although “commentators initially thought the UK Government’s revised funding proposals for Pool Re would have a significant effect on the provision of terrorism insurance in the UK,” upon closer inspection of the details it now appears that “there may not be any notable difference for policyholders,” According to Ian Kennett, executive director in Willis’ Real Estate Practice.

He cited the following “key facts” in his analysis:
• Since it was established in 1993 Pool Re has accumulated circa £5.5 billion [$8.63 billion] in reserves.
• Although the insurer member is free to charge its policyholders the premium it wishes, it is obliged to pay Pool Re for the reinsurance at tariff rates (set by Pool Re, but agreed by HM Treasury).
• For many years the Treasury has charged 10 percent of Pool Re’s total premium income for agreeing to act as reinsurer of last resort. The proposals increase this charge to 50 percent.

According to Kennett: “Premiums payable by policyholders will not increase as a result of the changes. If there were to be significant terrorism losses in the future, the changes would reduce the future ability of Pool Re to fund from its own reserves. This might then lead to tariff rates increasing more than they would have done had the changes not been made, however the current Pool Re reserves are so significant that the risk of this happening is low.

“It is reassuring that the changes will not have any impact on the availability of cover,” he added. “However, any changes to the way premiums are calculated arising from other modernization plans need to be monitored carefully to determine whether some tenants could be penalized while others in different locations benefit.”

Source: Willis Group Holdings

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