British insurers would probably not face any threat of rating actions in the wake of a terrorist attack due to protections on that country's Pool Re reinsurance mechanism, Moody's Investors Service said today.
In a special comment, Moody's said the Pool Reinsurance Company would be highly effective at protecting its members in the event of an attack or series of attacks, and that it would not expect any meaningful rating actions for pool members.
"The extent of the cover Pool Re provides is such that the amount per event and per annum that its large insurance company membership has to bear from a UK terrorism incident, or series of incidents, is relatively small," said Dominic Simpson, a Moody's vice-president/senior credit officer and author of the report. "Furthermore, the security Pool Re offers its members is exceptional as it is effectively guaranteed by the UK government."
Moody's noted that bombings in London in July, although not significant from an insurance standpoint, have raised questions about potential exposure to terrorism-related losses in the U.S., bringing the Pool Re program into the spotlight.
Pool Re is a mutual reinsurance company, for which membership is optional, that provides its insurance company members with reinsurance cover, on an all perils basis, in respect to UK terrorism losses related to commercial property and
business interruption.
Based on the large membership of the pool and the coverage it offers, Moody's believes it would be effective in guarding members' balance sheets against a major terrorism event.
As an example, Moody's noted that for the coverage provided, the maximum amount for which Pool Re members would collectively be liable would be the relatively small amount of 150 million pounds, or roughly $271 million U.S., in 2005, increasing to 200 million pounds, or $361 million U.S., in 2006.
As of the end of last year, Pool Re had a membership of 273, including 43 Lloyd's syndicates. Of the 88 insurance companies incorporated in the UK which are members, half have an ultimate parent company incorporated outside the UK.
With the impending expiration of the federal Terrorism Risk Insurance Act looming Jan. 1, 2006, some have suggested a similar mechanism be established within the U.S. as a long-term solution to the terrorism reinsurance issue. Additionally, others, including District of Columbia Commissioner of Insurance, Banking and Securities Lawrence Mirel, have suggested that the scope of the potential pool be broadened to include other massive exposures such as natural catastrophes.
Congress considered a Pool Re-based proposal during the initial debates that lead to the creation of the TRIA legislation, ultimately rejecting the concept. Currently, there appears to be little interest in picking the idea up again, according to lobbyists.
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