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Airmic warns over planned changes to Pool Re scheme

Airmic has warned of serious unintended consequences if reported changes to the Pool Re scheme go ahead, with a detrimental impact on insurance buyers and UK businesses.

It is understood that the Treasury (HMT) is demanding a substantial increase in the amount it charges the terrorism reinsurer for being a lender of last resort – a move that observers say is certain to feed through into higher premiums for UK companies.

“Pool Re is a key pillar in the UK’s defence against terrorism. It is highly valued by Airmic members and UK industry as a whole,” said Airmic CEO John Hurrell. “Airmic strongly believes that any attempt by the Treasury to increase its premium charges without sound risk justification will not only disadvantage risk managers but seriously jeopardise Pool Re’s ability to function in the long term. It is rumoured that HMT is wanting to increase its charge to Pool Re from 10% to something over 50% of premiums. Anything that undermines its financial position, and its ability to carry through vital reform, will certainly be a retrograde step and could have serious unintended consequences for UK industry. It would appear that the timetable set out by HMT will allow no time for consultation with representative groups such as Airmic.”

Although Pool Re has opposed these changes, it is recommending its 217 member companies to support them to avoid the risk of the scheme being wound up altogether. The vote will take place at an extraordinary general meeting on 21 November.

Pool Re has won some concessions. In the event of using the government’s backstop, the fees that Pool Re have already paid to the government will continue to be discounted against the repayment of any loan.  The member insurance companies will also now receive a dividend payout from Pool Re’s profits.

Airmic would like the Treasury to support its call for improvements to the scheme that would benefit policyholders.

“HMT’s proposal will generate a mountain of cash for HMT, a sweetener for the insurance industry by way of the dividend plan but absolutely nothing at this stage for the entities who have provided every penny to finance the whole scheme since its inception, the policyholders,” Hurrell said.

“The management of Pool Re are anxious to put his right by pressing for the scheme improvements we have been calling for over the last twelve months. We hope that even at this late stage, HMT will be supportive of these proposals and give Pool Re the go ahead to progress these plans for the benefit of all buyers.”

Pool Re is a mutual reinsurer set up by the insurance industry in 1992, with strong backing from Airmic, to cover commercial property when it became clear that the conventional reinsurance market would no longer cover acts of terrorism in many parts of the UK. If Pool Re’s reserves – currently in the region of £5.5 billion – are ever exhausted the Treasury will step in. However, Pool Re would eventually have to repay any money provided by the government.

The Treasury told the Financial Times: “The government is committed to ensuring that businesses have access to adequate and affordable insurance in the event of terrorist incidents. We do not believe this will have an impact on premiums for businesses or reinsurance premiums for insurers”.

Proposed update to the Riot (Damages) Act – what it means to insurance industry and its customers

Insurers are closely watching a legal case relating to the riots that took place in August 2011. The widespread rioting resulted in insurers paying out around £200 million in claims to affected households and businesses. The extent of the rioting, regarded as the worst for a generation, also served to highlight the need to update and clarify the legislation that determines compensation, the Riot (Damages) Act 1886.

The case, Mitsui Sumitomo Insurance Co (Europe) Ltd, Royal and Sun Alliance plc and others vs The Mayor’s Office for Policing and Crime concerns the damage sustained at the Sony distribution warehouse in Enfield. The judge, Mr Justice Flaux, ruled that consequential loss was not covered by the Act, but his decision was overturned at the Court of Appeal, placing state compensation for consequential loss as well as physical damage with the remit of the Riot (Damages) Act.

However, with the Act now more than 125 years old, society has moved on considerably since it was conceived and it is widely accepted that it is in need of an update. The government commissioned an independent review to bring it up to date. This was reported in September 2013, setting out 20 recommendations which form the basis of a consultation.

Two of the recommendations are particularly relevant to the insurance industry and its customers. These are the proposal to limit compensation under the Act to those businesses with an annual turnover of less than £2m, and that business interruption insurance (which isn’t mentioned in the Act) is formally excluded.

Removing insurers’ ability to claim back compensation from the police for businesses with annual turnovers in excess of £2mwill affect the cover insurers provide. Insurers may need to fully underwrite the riot risk for clients where the annual turnover is over, or close to, £2m a year. As well as resulting in a charge for cover, this may mean the introduction of limits on the cover available.

Only the smallest companies would still be able to access compensation under the Act. Figures from the Association of Business Insurers show that businesses with a turnover of less than £2m accounted for only 9% of the total value of commercial property material damage claims in the 2011 riots. Businesses with an annual turnover close to or in excess of £2m could see the cost of cover increase or terms and limits applied. Some may even struggled to get cover.

The recommendations were put out for consultation in June 2014 and more details of the reform of the Act – and the implications for the insurance industry and its customers – is expected later this year.

Tax mitigation

SPA PI scheme members will already be familiar with answering questions on the PII renewals about tax mitigation schemes. We have been in ongoing discussions with the insurers of the scheme, Zurich, who have confirmed that they will continue to underwrite existing SPA PI members in this respect.

Cyber War

Cyber liability continues to make the press, with examples of hacks into wifi systems, data leaks from Apple iCloud and alarming reports from PwC concerning British companies suffering in the region of 4,300 cyber-attacks each day. As companies become increasingly dependent on technology risk managers are becoming increasingly concerned about the possibility of cyber risk. Risks including computer fraud, accidental loss or theft of device, business interruption, operational error, data theft, hacking, viruses and violation of customer privacy are still being underestimated.

Corporates are gradually coming to terms with what was deemed an emerging risk less than four years ago but is now a major threat to businesses irrespective of their location or sector.

Underwriters have confirmed that those facing the biggest risk are the smaller businesses, where an incident could be catastrophic.  At Arlington we are working closely with insurers to provide cost effective insurance solutions to this problem. For further information contact Rob Marriott on 020 7292 6014 / robm@arlingtoninsuranceservices.com

D&O liability

Directors and officers risk has been a key issue on the boardroom agenda for the past decade. Although hardly a new risk, D&O liabilities are constantly evolving against the backdrop of the global financial crisis, changing regulation and companies’ international footprint. Particular concerns include tax issues, breach of contract, actions from regulators, bribery, fraud and corruption, employee actions (eg wrongful dismissal suits, actions related to health and safety), shareholder lawsuits and creditors / liquidator actions in relation to bankruptcy procedures.