Risk coverA 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.

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.

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.