U.K. Uses Captives To Tap Terror Pool
London Editor
London
If terrorism continues to be excluded by the reinsurance marketplace, U.K. insureds increasingly will look to use new or existing captives to obtain terrorism coverage through the U.K. government-supported terrorism insurer–Pool Re–according to several captive experts.
According to Peter Child, senior analyst for the Guernsey Financial Services Commission, Guernsey has seen about seven existing captives used to access the terrorism coverage provided by Pool Re, while three new captives were formed for similar reasons. Only insurers can access Pool Re, he said, hence the move on the part of some buyers to use captives. "I would imagine a significant number are exploring this avenue," said Shaun Brook, account manager with Willis Management (Guernsey), a captive manager.
Because the property market is hard and the deductibles are increasing, U.K. insureds are being forced to retain a large portion of the risk themselves, he said, noting that Pool Re provides a facility to reinsure their terrorism risk.
Mr. Brook said he has a client, a U.K. retail company, which had recently formed a captive and decided to use it to access Pool Re. This client, he said, found that recently imposed terrorism exclusions by some reinsurers had created gaps in the amount of property coverage available in a 100 million, excess of 100 million layer.
This U.K. retail company elected to write property directly into the captive, which then reinsured the terrorism risk to Pool Re, he explained.
Thus, the captive is paying a premium directly to Pool Re, and therefore has protection for that layer of coverage, "irrespective of the position of the markets on the reinsurance slip," he explained.
"Under the membership agreement of Pool Re, you have to reinsure 100 percent of your terrorism risk; you cant retain it and you cant select," he said. "So if you become a member, insurers have no choice but to reinsure all of their risk for terrorism with Pool Re."
Since Pool Re is reinsured by the U.K. government, if assets reinsured to Pool Re are above 1 billion, the insurer (or captive) has to pay premiums to the government as well, Mr. Brook explained.
Mr. Child said that most of the activity he has seen to access Pool Re has been accomplished through traditional captives, rather than protected-cell captives, which he found surprising.
"You might have thought theyd take advantage of the PCC route because of the lower set-up costs and ease of administration, but its been mainly through the traditional captive route," he said.
(PCCs are companies that exist as a single legal entity, but can be divided into an unlimited number of cells. The assets and liabilities of each cell are legally separated from those held by the other cells within the same PCC, and as a result, creditors have no recourse to the assets of another cell.)
"It may be an interesting concept for a PCC to be established to allow companies to rent a cell to join Pool Re for the basis of insuring and reinsuring their property exposures," said Mr. Brook.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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