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The private reinsurance market would like to assume a greater role in reinsuring risks such as flood and other catastrophic risks that are covered by federal or state insurance programs, according to industry leaders.
In fact, even the U.S. government through the Federal Emergency Management Agency has been tasked with exploring how the private reinsurance market could assume flood risk covered by the debt-ridden National Flood Insurance Program.
“The market is poised to take on more risk,” said Frank Nutter, president of the Washington-based Reinsurance Association of America.
Reinsurers in the U.S. have considerable exposure to U.S. wind risk, he said. “Both flood or earthquake are viewed as diversifying risk. And the market is very robust in capital, it has a lot of capital to deploy. Any opportunity like this one to explore underwriting a new risk like this one is very attractive to the market.”
R.J. Lehmann, senior fellow at the R Street Institute, a Washington-based free-market oriented think tank, said that expanding private reinsurance's role in public risk pools is “possible and a good idea, and it's happening to some extent.”
He cited the California Earthquake Authority as an example of a public entity that taps the private market.
“They cede a significant part of their risk to reinsurers, and they've used cat bonds,” said Mr. Lehmann. He added that residual risk pools in several states, including Louisiana, Massachusetts and North Carolina have turned to the private reinsurance market. He also noted that Florida's Citizens Property Insurance Corp., which provides coverage to Florida citizens who cannot find coverage in the private market, closed a $750 million, two-year cat bond last year.
Brad Kading, president of the Hamilton, Bermuda-based Association of Bermuda Insurers and Reinsurers, said private reinsurers already cover flood risks outside the U.S.
He said that giving private reinsurers a larger role in the U.S. flood market would benefit taxpayers by reducing additional federal debt from future flood losses.
“Private insurance and reinsurance also means that prices would be risk-based, and price signals would warn consumers of the risk associated with their properties,” he said.
The RAA's Mr. Nutter said the Biggert-Waters Flood Insurance Reform Act of 2012 required FEMA to contract with an outside party to evaluate the interest of the reinsurance market to assume flood risk, to prepare a flood insurance model, and to evaluate privatization options more broadly than the reinsurance markets. The law also called for a separate study on affordability.
Mr. Nutter said requested proposals for the study were due at the end of August and the deadline for announcing who would conduct the study was supposed to be by Sept. 27, but the deadline passed with no announcement.
Mr. Nutter said there seems to be no organized opposition to the idea that private reinsurers become more involved in public risk mechanisms.
The rapid growth of insurance-linked securities is changing the playing field for traditional catastrophe reinsurers, creating price competition and forcing reinsurers to redeploy capital — in many cases into their own start-up ILS units.