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A large proportion of the insurance claims arising from the explosions that ripped through London is likely to fall on Pool Re, the government-backed mutual reinsurer for UK terrorism risks.

Insurance market sources said it was too early to assess the level of losses from the explosions, however, many of the claims were likely to be from damage to the transport system.

London insurers and brokers indicated that Transport for London had established a captive insurer for property risks. A captive is an insurance company set up by a non-insurer. This captive is understood to be a member of Pool Re, which meant it would have bought insurance from Pool Re to cover the risks to the transport system from terrorism.TFL could not comment on its insurance arrangements.

Pool Re was established in 1993 after IRA terrorism caused commercial insurers to abandon the market. The Treasury acts as a reinsurer of last resort for the mutual. Members of Pool Re, the majority of the UK insurance industry, buy reinsurance cover from Pool Re.

This provides them with their own insurance if they have to pay claims from damage to commercial property, including business interruption, as a result of terrorism.

Pool Re builds up funds from the premiums paid by insurers. If an incident occurs, and it is deemed to be a terrorist attack, then Pool Re would meet the claims of members who had bought coverage. However, if losses from a terrorist attack are so large that they exhaust Pool Re’s funds, then the Treasury would step in to meet these claims. This is not expected to be necessary in this case.

Pool Re said: “We are in discussion with HM Treasury about today’s incidents,” but would not comment further. Insurance industry sources said because there had not been a terrorist attack in London for many years Pool Re’s funds had accumulated and it should have no difficulty in meeting claims.

“Pool Re has plenty of money,” said one person familiar with the situation. However, one London insurance market source pointed out that under the terms of the arrangements with Pool Re, TfL would be required to pay a proportion of any claims.

He suggested this was “several million pounds”. TfL had been looking to buy additional insurance to cover claims below the point at which cover from Pool Re would kick in, he said.

Insurers, including Lloyd’s of London, said they were still assessing the potential losses from the attacks. However, shares in insurers in UK and Europe fell on concerns about the level of potential pay-outs.

Brokers and insurers also said it was still too early to say what effect the incidents in London would have on premiums, however early indications were that they could rise.

“An immediate guess would be that [the incidents] would lead to an increase,“ said Theo Butt, who leads insurance broker Marsh’s terrorism placement team in London.

The attacks are also likely to have ramifications for London’s property market. “I think it could be quite damaging, in the New York experience there was an immediate downturn in activity in the residential sector, people took a period to decide what was going to happen next,“ said one property expert.

But the lessons from New York and Madrid were that life would eventually carry on as normal, he added.

Thoughts will inevitably turn to tall buildings, such as those at Canary Wharf, east London. Although security has improved, in the wake of the 9/11 attacks, some occupiers are still reluctant to take space in skyscrapers.

With several a handful of new towers planned for central London, the threat of terrorism may weigh on developers’ minds.as they proceed with such projects.

Copyright The Financial Times Limited 2019. All rights reserved.

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