The Treasury has issued a set of general principles of interpretation in respect of its application of the definition of an "act of terrorism" under the Retrocession Agreement with Pool Re in accordance with the Reinsurance (Acts of Terrorism) Act 1993, following consultation with the insurance and commercial property industries.
Pool Re was set up in 1993 to ensure that terrorism insurance for commercial property would continue to be available in Great Britain, following the withdrawal of reinsurers from the market.
Insurance companies offering terrorism insurance cover would do so up to a limit of £100,000 (usually). For cover over that limit, insurers who provide terrorism cover could offer additional cover up to the amount of the sum insured, for an additional premium paid by the insured party. The insurance company would then re-insure the amount of cover in excess of £100,000 with one of the commercial re-insurance companies offering cover for damage caused by terrorist acts. Pool Re is an independent commercial re-insurance company, owned by its members (who are insurance companies who will avail themselves of its cover). It also has a contractual arrangement with the Government (for which it pays a premium) whereby the Government will meet insurance claims which are covered by the Pool Re re-insurance cover, once Pool Re's resources are exhausted (the Government being the so-called "insurer of last resort"). Originally Pool Re provided cover only for commercial property damage and business interruption costs as a result of fire and explosion caused by certain terrorist acts.
Following the events of September 11th, a number of re-insurance companies started to withdraw terrorism cover, which meant that insurance companies started to withdraw it also. The Treasury therefore undertook to review the actual risks which it would underwrite, and the way in which Pool Re is financed. Formerly, Pool Re was financed through the additional premiums obtained by its member insurance companies for the additional cover.
Following on that review in 2002, Pool Re cover was extended from “fire and explosion” only, to cover terrorist attacks which cause commercial property damage and consequent business interruption on an “all risks" basis. The scheme now includes cover for damage caused by such things as contamination, impact by aircraft, or flood damage caused by terrorist acts. However “war risks” continue to be excluded, and hacking and virus damage to electronic components is also excluded, largely because of the considerable difficulty, if not impossibility in establishing that a computer virus was the result of a terrorist attack. From 1 January 2003 the clause excluding damage caused by nuclear devices was to be deleted.
From 1 January 2003 changes were made to the financing of Pool Re to encourage competition and protect customer interests, and the governance arrangements were made more transparent in the public interest.
Competition in the market was intended to be encouraged by the alteration of the former retention arrangements. Previously insurers bore the first £100,000 per head of cover, which meant that the total liability of the insurer depended on the number of heads of cover affected. This was changed to a per event retention, combined with an annual aggregate limit for each insurer, based on the overall terrorism market share of each insurer of industry wide retention figures. The retention figure industry wide was set at £30m per event for the year from 1 January 2003, with an annual maximum industry wide retention of £60m for the year. Thus insurers will have their losses capped and will know in advance the maximum which they could be called upon to pay out in any one year, with Pool Re and thereafter the Government bearing the additional insurance costs. The maximum per event and annual figures are to be increased over the four-year period from 2003 to 2006 to allow the market to become accustomed to the new arrangements.
Under the Retrocession Agreement between Pool Re and the Treasury, it falls to the Treasury to certify whether a particular incident falls within the definition of an "act of terrorism" and consequently whether it is covered by the Pool Re arrangements. The interpretation principles are primarily targeted at insurance industry professionals to help clarify the existing Pool Re cover arrangements.
The scope of cover which Pool Re provides is not changed by the interpretation principles, however, the Treasury and Pool Re have also agreed to review the technical detail of the Retrocession Agreement to make sure that it continues to be relevant, effective and up-to-date.
The interpretation priciples are available from the HM Treasury website.