Insurers are on tenterhooks over the amount the new Pool Re will cost them, following the Treasury's announcement on Tuesday that it would totally alter the pool's form from 1 January 2003.

Pool Re will become, in effect, a treaty reinsurer instead of an insurer of last resort. The way in which its new form will be paid for by insurers has yet to be established.

The deal was hammered out between the Treasury, the Association of British Insurers (ABI), British Insurance Brokers' Association (Biba), Confederation of British Industry, Association of Insurance and Risk Managers (Airmic), British Retail Consortium and the British Property Federation.

Until 1 January, Pool Re will be extended to cover all terrorism risks, including bio-terrorism, while continuing to operate on the basis that insurers retain the first £100,000 per head of cover per policy.

At present, insurers pay Pool Re a significant proportion of the premium taken on terrorism risks to maintain the pool.

To take advantage of the extended pool, insurers will have to pay 100% of the additional premium taken, said an ABI representative.

From the beginning of the New Year, Pool Re will cover all risks. But the industry's collective exposure will be capped at £30m per event and £60m per year.

These per event and per annum amounts will continue to rise annually: £50m and £100m in 2004, £75m and £150m in 2005 and £100m and £200m in 2006, where it will remain.

Individual companies' liabilities will also be capped depending on market share.

ABI general insurance head John Parker said that Pool Re was currently working with actuaries to work out how individual insurers would contribute to the pool.

"Because it's a mutual, it needs to find an equitable way to do this," he said.

However, a senior industry figure said the method of payment needed to be clearer.

"How is the premium charged, how is the information tracked, how do the limits work and will you have an option to buy down below?" he asked.

"The Treasury has driven an incredibly hard bargain."

Royal & SunAlliance commercial underwriting manager Colin Short said he was very pleased with the deal and anticipated no problem in spreading the cost fairly.

"How does any reinsurer assess how it will charge an insurer, on premium income or exposure?" he asked.

"We can expect Pool Re to take a similar approach."