Pool Re’s Terrorism Insurance and the adverse selection rule

March 2020

Pool Re is the government-backed UK terrorism insurance facility and, as such, it is the largest terrorism insurer operating within the UK.

Pool Re is actually a reinsurance company, so whilst your insurer may appear to be providing terrorism cover, this will often be re-insured by your insurer with Pool Re.

It may not always be clear whether your insurer or Pool Re is ultimately underwriting your terrorism section. It’s important to know, so if you’re uncertain, you can ask your insurer or broker directly and they’ll be able to confirm the underwriter of your cover.

Any policyholder who has terrorism cover underwritten by Pool Re must comply with Pool Re’s regulations, such as the adverse section rule. This rule requires that policyholders do not select against Pool Re, meaning that if a policyholder were to purchase terrorism cover that is underwritten by Pool Re, the policyholder must purchase Pool Re terrorism cover in respect of all insured properties that are eligible for terrorism cover.

This rule aims to prevent policyholders from purchasing terrorism cover on high-risk locations, and not on low-risk rural locations. It is important to note that the adverse selection rule is not limited to properties insured under the same policy or with the same insurer or broker, but applies to all properties for which the same named policyholder effects cover.

If a policyholder fails to comply with the adverse selection rule, they could be left in a precarious financial position in the event of a terrorism claim. In such an instance, the insurer for a property where terrorism cover has been purchased could potentially avoid paying the claim on the basis of the policyholder failing to provide a ‘Fair Presentation of the Risk’.

This means that the insurer would not have offered the quotation in the first place if the policyholder had advised that they were only purchasing terrorism cover for some of the properties.

Some insurers have a policy condition within their wording which requires the policyholder to arrange all of their terrorism insurance with Pool Re, or conditions to the effect that if the insurer is unable to obtain a recovery from Pool Re, they will not pay the claim. Both of these conditions give the insurer additional ways of not paying a terrorism claim where the policyholder has not complied with the adverse selection rule.

For policyholders who wish to elect which properties to purchase terrorism cover for and to decide which properties do not require terrorism cover, the solution is to use a specialist terrorism insurer or facility which does not reinsurance with Pool Re.

If you’re a property owner and you’re unclear as to your current terrorism insurance structure, please contact us here to arrange a free review of your insurance portfolio, with recommendations subsequently made on the terrorism insurance structure to best suit your specific needs.