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Public-private partnerships seen as reinsurance solution for catastrophe risks

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Reinsurers seeking growth in a highly competitive marketplace are exploring the possibility of taking on some risks hitherto reinsured by governments or state-backed plans, experts say.

Increased confidence in modeling risks, coupled with the need to find growth outside of traditional areas of coverage or geographic exposure, are resulting in greater appetite to underwrite such risks, they say.

While about $2 billion of reinsurance premium is generated by the reinsurance of government-backed programs to insure catastrophe risks, this remains a hugely untapped market with large amounts of potential reinsurance premium volume still being held by governments, said Dominic Christian, executive chairman of Aon Benfield International in London.

Such risks include U.K. and European flood and U.S. earthquake exposures, among others, he said.

There is a “great opportunity” for reinsurance capital providers to enter into public/private partnerships and transfer some of this risk, he said.

And coupled with increased appetite from reinsurers to grow into untapped markets, governments likely will be encouraged by the reinsurance market's solid recent financial performance, Mr. Christian said.

At a time when many countries' budgets have been stretched by recessionary pressures, this may add to a willingness to transfer more risk to reinsurance markets, he said.

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Governments around the world are looking to move certain catastrophe risks off their own balance sheets, said Richard Booth, vice chairman at Guy Carpenter & Co. L.L.C. in New York.

Flood risk, for example, is an economic and a political issue in almost every country, said David Priebe, vice chairman with Guy Carpenter in New York. Many governments are trying to work out how to manage that risk and, given the economic constraints that many of them face, there is an increased appetite for some of that risk to be transferred to the private sector, he said.

In some cases, governments likely are unaware of the size of the risks they are retaining, said Christopher Schaper, president of Montpelier Re Ltd. “Event amplitude around the world will continue to increase,” he said, and there are opportunities for reinsurers to help governments with that increased need for capacity.

This is an area of opportunity for reinsurers, said Victor Peignet, CEO of Scor Global P&C S.E., a unit of Paris-based Scor S.E.

“The reinsurance market has shown that it can take natural catastrophe risks pretty well, and it makes sense to open (what currently is reinsured by governments) up to the markets,” Mr. Peignet.

“We see opportunities for public/private partnerships,” he said.

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The influx of new capital from nontraditional sources, such as pension funds, likely will also help the development of such business, making it so it would not simply be “cannibalizing” existing business, Mr. Peignet said.

This is a big topic for the reinsurance industry, and brokers have worked hard and effectively in some cases to find solutions for governments wishing to transfer risk, said Jean-Jacques Henchoz, CEO of reinsurance for Europe at Swiss Re Ltd.

There are potential difficulties, as seen with a failed proposed plan to insure flood risk in the Netherlands, where authorities may deem funds anti-competitive, he said. But there are certainly insurance and reinsurance gaps in areas such as German flood risk or Italian earthquake exposure where the reinsurance industry can play a role, he said.

“We can really do a lot as an industry — and we should really do a lot — for sustainability,” he said.

While politicians frequently are focused on the short term, the reinsurance industry should kick-start a dialogue on longer-term sustainability issues, he said.

“We need governments and insurers to stand in line” and step up where there is underinsurance, said Michael S. McGavick, CEO of XL Group Ltd.

Areas such as U.S. flood risk provide huge opportunities for insurers and reinsurers to become involved in risks that are backed by governments, he said (see related story).

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