The Strategist

British Pool Re issues catastrophe bonds against terrorist attacks

02/27/2019 - 04:29

British reinsurance company Pool Re has announced release of the world's first catastrophe bonds designed exclusively to protect against terrorist attacks.

According to the company, three-year bonds of 75 million pounds sterling ($ 99 million) with a coupon of 5.9% are placed through SPV-company Baltic PCC Ltd.

Bonds that allow investors to directly insure risks associated with terrorism in the capital markets provide repayment in the event that the damage from terrorist attacks in the UK in one year exceeds 750 million pounds, writes Financial Times.

"We have worked for several years to place these papers, and we are glad that we were the first to create a completely new source of capital in the market for protection against the risks of terrorism," said Pool Re's general director Julian Enoizi. According to him, 14 insurance programs against terrorist acts existing in the world will be able to use this experience to attract capital in the future.

Pool Re was established in 1993 with the support of the UK government after the IRA terrorist attack in April 1992 near the Baltic Stock Exchange building in the City of London. Insurance damage then amounted to 650 million pounds. Initially, Pool Re was supposed to protect British companies from damage as a result of the IRA attacks, but over the years its range of responsibilities has steadily increased.

Catastrophe bonds (cat bonds) emerged in the early 1990s to protect insurers. Most often, they provided insurance protection against natural disasters, but in recent years they have gone into other areas, including protection against cyber-attacks. Such bonds are usually characterized by high yield, which has attracted the increased attention of both pension funds and sovereign wealth funds in the conditions of low interest rates around the world.

The catastrophe bond market, as well as all insurance related debt securities (ILS), is growing rapidly: according to insurance broker Willis Towers Watson, at the end of 2018, $ 93 billion was invested in such securities versus $ 18 billion in 2009.

For a long time, ILS for the British market were produced in Bermuda. However, in 2017, the British government approved new rules that allow starting such papers in London from 2018. Before Pool Re there was only one issue of such papers, but it had nothing to do with protection against terrorist acts.

According to Pool Re experts, one of the important features of the market is unpredictability of the terrorist threat. However, new advances in risk modeling related to terrorist attacks help convince investors to assess such risks more calmly, notes chief investment director of Pool Re.