Pool Re’s Clementi: Industry cannot “run for the hills” on systemic risk

Pool Re CEO Tom Clementi has warned that the (re)insurance industry must face the challenges presented by systemic risks and increase its footprint or run the risk of losing its relevance in the next decade.

Speaking to The Insurer TV as part of its Leading Voices series, Clementi referenced cyber and climate change as areas where the industry must play an active part in finding solutions and new ways of getting involved.

“If we want to remain relevant as an industry over the next five, 10 years, we have to face into systemic risk,” Clementi said in his first in-person video interview since being appointed CEO of Pool Re in April.

“It’s not good enough to say it’s too hard, it’s too difficult, we’re going to bolt these watertight exclusions onto our policies and run for the hills,” he added.

Clementi stressed the importance of the collaboration between the (re)insurance industry and government to tackle the growing problems arising from systemic risks.

These types of risks could arise from cyber events, pandemics or climate change, he noted.

It has been well documented that neither government nor the private sector would be able to tackle these issues alone, and therefore the obvious solution should come in the form of public-private partnerships.

The Pool Re model is an obvious one for this. As a successful public-private partnership that has provided protection against terrorism risk in the UK since 1993, it is a model – “or at least parts of it” – that could be used to protecting against other systemic risks, said Clementi.

“There are plenty of other systemic risks out there – I don’t see why a similar model couldn’t be rolled out for cyber or for pandemic or for climate change,” he said.

However, he also warned there are “lots and lots of issues as to practically how you go about doing that”.

Improving the model

Terrorism has taken many shapes and forms since Pool Re was established in 1993 and evolving to meet new risk requirements is in its DNA.

Clementi flagged how its expansion of coverage to include a cyber trigger and non-damage business interruption demonstrates this.

But most recently – and what prompted The Insurer TV to sit down with the recently appointed CEO – Pool Re launched a consultation about moving its reinsurance scheme to a catastrophe treaty reinsurance model.

Clementi noted Pool Re is “better positioned” to deal with new and emerging threats using this proposed treaty model, which is key for its relevance moving forward.

“The proposal to move to a treaty reinsurance framework will actually make our scheme much simpler to operate administratively for our members,” he explained. “There will no longer be a pricing tariff they’re required to adhere to, there will no longer be an underwriting manual that they have to adhere to and there won’t be a need for the quarterly bordereau.”

But most importantly, it would enable more risk to be returned to the market.

“The point about returning risk to the market is that it moves the taxpayer further and further away from picking up the tab if there is a terrorism event, and that is a mandate we have from the Treasury – to return more risk to the market. And it is actually a mandate that our unlimited financial guarantee depends upon,” Clementi said.

With this model, members of this pool could increase retentions for conventional terrorism, which means more risk would be carried in the private market without additional exposure to CBRN or cyber-triggered terrorism.

This is achieved through a split between conventional and non-conventional terrorism – the latter being cyber and CBRN. Members could therefore retain greater risk for conventional terrorism without increasing exposures to non-conventional perils.

In addition, the new model would also enable wider penetration in the SME space across the UK because it allows increased flexibility around pricing.

“Evolving our cover and evolving our reinsurance scheme will be simpler with a treaty model. It’s a model where we can add more and more threat pathways, more and more risk factors, and we can increasingly calibrate and parameterise them to enhance the model to provide evolved coverage over time as the threat develops, and of course it is developing all the time,” Clementi added.

Speaking the same language

Clementi succeeded Julian Enoizi as Pool Re CEO in April this year, and since then the UK’s terrorism pool has said it would cut terrorism rates by as much as 30 percent, depending on the area – a reduction to come into effect in October.

Since taking the helm at the terrorism pool, Clementi has made it a priority to communicate clearly the value proposition Pool Re brings to government and its members.

Speaking of partnerships between government and the private sector, Clementi noted the (re)insurance industry has been on the receiving end of some negative press following some of the claims issues that arose during Covid-19, which cast doubt among some around the value it can add.

But it also falls on the industry to express its intentions clearly, with both its customers and government.

“We could do an even better job at explaining what we do and how we add value. It’s important when we do speak to government or liaise with government, we increasingly talk the language of government and that, as an industry, we can come together so we can present more of a united front if we’re looking to partner with government,” Clementi concluded.

In this 14-minute interview, Clementi provides further detail on:

  • The newly proposed catastrophe treaty reinsurance scheme
  • What the response to this proposal has been so far
  • Clementi’s priorities as Pool Re CEO
  • The relationship between Pool Re and HM Treasury
  • How the Pool Re model can be extrapolated towards other types of systemic risks