UK ILS regime should target esoteric risk: Pool Re CEO
London should become a destination for insuring more esoteric and difficult-to-place risks, rather than a simple provider of capacity in competition with other ILS markets, according to Pool Re CEO Julian Enoizi.
But the executive said placing an exotic risk in the ILS market was “a long journey”.
Enoizi was speaking after the closing last week of Pool Re’s £75mn ($98mn) Baltic Re terrorism cat bond.
Others seeking ILS cover for a similarly complex risk should start the process as early as possible, he advised.
The Baltic Re transaction could serve as a template for other esoteric risks such as cyber, he added.
It cost Pool Re more to place the cover in the ILS market than in the traditional market, but the firm hopes as investors become more comfortable with the peril the cost of coverage will drop.
The carrier’s strategy is to get the ILS market at ease with terrorism risk.
In the UK the peril has been essentially underwritten by the government for the last 25 years, but Enoizi expects more risk will be placed with the capital markets in future.
The first step for Pool Re was to purchase one of the world’s largest retrocession programmes last year.
“ILS was a logical next step to see if we could bring capital market capacity,” the executive said.
Pricing for the cat bond settled at 590 basis points – the top end of initial guidance.
The transaction covers Pool Re’s losses between £500mn and £700mn as a result of terror attacks from various causes, including explosive devices, chemical or nuclear explosions and physical damage from cyber attacks.
The bond covers England, Wales and Scotland on an indemnity, annual aggregate basis.
To get investors comfortable with the risk, Pool Re was transparent with the modelling that had been undertaken, including the frequency and severity parameters, said Stephen Burr, chief actuarial officer.
The models use “line-of-sight modelling”, which takes account of larger buildings shielding smaller buildings and calculates how blast impulses move over and between buildings.
Launched in mid-January, the transaction was oversubscribed, said chief investment officer Ian Coulman.
Investors across the US, Europe and the UK that signed up to the deal comprised ILS funds and a couple of institutional clients.
Pool Re used the UK’s ILS legislation to place the deal via a special purpose vehicle, Baltic PCC.
With terrorism being a difficult risk to place and Pool Re being the UK terror pool, the reinsurer said it made sense to place the deal in the UK.
The Prudential Regulation Authority was supportive of the process, Coulman added.
“It was a learning process for them,” he said.
Pool Re had previously indicated it would tap the ILS market for up to £100mn, instead of the £75mn finally targeted.
“We had to start somewhere. We wanted to be successful with the amount we went with and didn’t want to go for an amount that would be impossible to place,” Enoizi said.
The terrorism reinsurer plans to look at placing more limit in the ILS market.
Enoizi said he hopes that other terrorism pools around the world will follow suit and use the UK ILS regime to seek cover.
The issue will be the ILS market’s first terrorism cat bond since the 2003 Golden Goal transaction, which insured international football federation Fifa against cancellation of the 2006 World Cup due to terrorist incidents.