Federal Gov should protect taxpayer and maximise private reinsurance use

With existing capacity and an appetite for risk in the private reinsurance sector such as mortgage, flood, terrorism and earthquake, the federal government should encourage good risk management practices and actuarially sound rates and maximise use of the private reinsurance market.

Government resources should be more properly focused on the risks that the private sector cannot assume, such as disaster mitigation and assistance. The government should participate only when the private market either is unable to underwrite a risk, or can write it in only limited amounts, such as terrorism. In addition to underwriting risk, reinsurance can, for example, help federal programmes and operations set good risk management practices, price risk appropriately, and protect US taxpayers.

Earthquakes, a major catastrophe risk, present potential reinsurance opportunities the federal government may wish to more fully explore. The uninsured and underinsured earthquake peril presents a potentially significant risk to banks, taxpayers and the overall economy. Although there are no statutory impediments to insurers underwriting the risk, earthquake insurance is not a requirement for obtaining a federally-backed mortgage loan. Very few homeowners in earthquake-prone areas purchase earthquake insurance.

For example, only 12 percent of California’s residents purchase earthquake insurance, and only 7 percent of the population across the US buy it even though a US geological survey notes that at least 10 US states have significant numbers of people exposed to potential major damage from an earthquake. A greater use of reinsurance could mitigate some of the economic impact that would be borne by the federal government.

Several federal programmes have already focused on private market reinsurance opportunities.

For example, the Federal Housing Finance Agency’s (FHFA) credit risk transfer programmes (CRT) for Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were launched in 2012 while the GSEs were in their fourth year of conservatorship to enlist the private sector to reduce taxpayer exposure to the GSEs’ mortgage risk. In 2013, the GSEs initiated a pilot $77 million reinsurance transaction; since then it has grown exponentially. As the GSEs continue to innovate risk transfer

In December 2015, Congress enacted a highway reform bill that included an authorisation for the Export-Import Bank of the United States (EXIM) to establish a pilot programme for reinsurance “to share risks associated with the provision of guarantees, insurance, or credit, or the participation in the extension of credit, by the bank”.

In 2016, EXIM issued public solicitations seeking risk management analytics regarding risk-sharing structures to determine whether there might be an opportunity to economically transfer some of the risks associated with parts of EXIM’s portfolio to the private market. A reinsurance placement in this pilot programme, if finalised, is a positive first step towards privatising appropriate export risks in this space.

National Flood Insurance Program

In 2016, the Federal Emergency Management Agency (FEMA) secured reinsurance for the National Flood Insurance Program (NFIP) to offset some of its risk to the private sector in lieu of US taxpayers, under the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowners Flood Insurance Affordability Act of 2014.

FEMA’s second placement of reinsurance in January 2017 marked another step towards achieving a stronger and more resilient NFIP, and sets the foundation for a multiyear reinsurance programme. FEMA and Congress should consider additional actions that encourage private market risk transfer, choices, and developments to benefit policyholders and taxpayers. From a reinsurance perspective, Congressional legislative reforms that would clarify current law to allow private lenders to accept private sector flood insurance policies to satisfy the mandatory purchase requirement of the National Flood Insurance Act would be beneficial.

Legislation should also be considered to bolster FEMA’s reinsurance authority, the continuation of a glide path towards risk-based rates, and the release of property-specific loss information from NFIP claims, provisions that would improve and streamline mapping and require FEMA to use enhanced risk assessment tools.

Where appropriate, the federal government should evaluate other federal programmes where opportunities may exist to utilise the private market to share risks and protect US taxpayers. Earthquake risk is one such opportunity and it should warrant further study by the
federal government.

Karalee Morell is vice president of the Reinsurance Association of America. She can be contacted at: morell@reinsurance.org