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ILS terrorism bonds a “logical next step” for Pool Re: Enoizi


The terrorism protection gap is now larger than ever and expanding all the time, underlining the need for innovative and effective solutions, with the insurance-linked securities (ILS) space a logical evolution, says Pool Re Chief Executive Officer (CEO), Julian Enoizi.

The CEO of the UK’s government-backed mutual terrorism reinsurer, Pool Re, addressing an audience in London in early December 2016 at an ILS industry event, said that the terrorism marketplace should embrace the ILS sector’s features and capacity.

The increased interconnectedness of the world and the continued transition to a truly digital world, among other factors, has contributed to the evolution of the terrorism space in recent times. The nature of the targets has changed, explained Enoizi, and motivations have been seen to move from nationalist to fundamentalist.

Owing to the unpredictability of terror events around the globe the terrorism sector has always been a very challenging area for the insurance industry but, as the landscape has evolved and the protection gap broadened, so has the appetite amongst the risk transfer landscape to assume terrorism risk.

And Enoizi feels that the features and capacity of the ILS space “should be embraced as a logical next step.”

“The prospect of crafting and issuing a terrorism bond is of particular interest to Pool Re, but we as an industry need not stop there. Through collaboration under the new rules, we may be able to design new kinds of coverage which create opportunities for the insurance market while removing liability from the government’s balance sheet, and thus from the taxpayer,” said Enoizi.

Enoizi explained that when Pool Re was established terrorism exposures were largely considered uninsurable, but the private market has gradually increased its participation in the space. But despite increased private market involvement, an entity such as Pool Re is still required as the impacts of terror events are unpredictable, far-reaching, and potentially extremely costly.

Regarding a terror bond, Enoizi said that questions remain around the modelling of such a transaction when compared to catastrophe bonds for example, a key sub-sector of the ILS space that are mainly focused on natural disasters, as models for natural disasters are far more advanced than those for terrorism events.

“Models are not yet sufficiently credible to support a bond issue, which makes pricing a real challenge. Investment in expert analysis and partnerships with academia are helping us to understand the risk better, and to model it more reliably. It is critical to realise the shortcomings of whatever models are produced, but this difficulty does not negate the potential for a terrorism bond. We simply have to think creatively,” continued Enoizi.

“ILS should encourage us to consider new ways to structure government insurance backstops that remove risks from the public balance sheet. If we lead the way, we will realise not only these valuable benefits, but we will also create a commercial opportunity,” concluded Enoizi.

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