Pool Re buying retrocession for non-damage business interruption risks

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Pool Re, the UK government backed mutual terrorism reinsurer, is back in the market to source an additional up to £50 million (US $64m) of retrocessional reinsurance protection to cover the new non-damage business interruption (NDBI) it assumes.

Pool Re logoPool Re expanded the terrorism reinsurance protection it offers to the UK insurance industry in March this year, as it sought to offer non-damage business interruption (NDBI) cover to protect businesses from interruption costs in the event of a terror attack even if their premises were not damaged.

Given this expansion the Pool Re retrocession program needs to be augmented and extended to protect the pool against these risks.

As a result Pool Re explained that it is currently working towards a retrocession placement for July 1st which it expects to be around £40 million to £50 million in size and designed specifically to cover these NDBI exposures.

Pool Re further said that its NDBI retrocession will be separate and discrete from the main retro placement that it renewed earlier this year.

The reinsurer secured a £2.3 billion retrocession programme this year, led by reinsurance giant Munich Re and including its first ever catastrophe bond, the UK issued £75 million Baltic PCC Limited (Series 2019) terror cat bond.

The new NDBI retrocession will cover Pool Re’s net retained losses once they exceed an attachment point, the level of which is still to be determined.

Pool Re’s chief underwriting officer, Steve Coates, commented on the retro buy, “NDBI retro is consistent with our aim of not retaining risk that the market is capable of writing. Although the market preferred that Pool Re create the NDBI solution, most of the risk will be retained either by Members, through their retentions, or passed to the retrocession market.”

So it sounds as if Pool Re will look to traditional sources of retrocessional reinsurance for this NDBI cover, although that’s not to say some specialist ILS funds or third-party capital vehicles could have a small participation, as some are certainly capable of underwriting this risk.

It’s interesting to consider whether the NDBI retro coverage could be structured with a parametric trigger, paying out based on the size of a terror event and its expected impact to business, triggered off key metrics about the terror attack itself as well as economic productivity, for example.

Being a business interruption risk, there are often more ways to address a financial protection for this than just a pure indemnity trigger structure. Perhaps in years to come Pool Re will look at other ways to secure contingent capital coverage for non-damage business interruption risks after terror attacks.

It’s also interesting to consider whether NDBI could become part of a future Pool Re terror catastrophe bond issuance.

Pool Re said that its view of the forthcoming retrocession structure will be informed by its proprietary, bespoke NDBI model, which its Members can also use to help quantify and price their retained risk.

That’s important as it means Pool Re’s view of risk is aligned with the members, making the retrocession a more easy fit to the exposure it has assumed.

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