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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”.