15 October 2017 Insurance

Storms focus Congress on protection gap

The scale of the protection gap in the US highlighted in the aftermath of the recent hurricanes could help nudge the political conversation around how future disasters are financed towards a greater willingness to involve the private sector in risk mitigation.

That is the view of Frank Nutter, president of the Reinsurance Association of America (RAA), who argues that Congress will be hit with multiple requests for disaster assistance in the wake of the recent storms, as well as having potentially to refinance the National Flood Insurance Program (NFIP).

“Congress will start to recognise that post-disaster finance is not the best way of dealing with this—they may focus more on risk mitigation strategies and incentives to get insurance coverage in place as a result,” Nutter said.

This is a much wider issue than windstorm or flood risk in Florida, he stresses. For example, it is estimated that only around 10 percent of homes in California have insurance protection against earthquake risk, despite the efforts of the California Earthquake Authority, while penetration rates of flood insurance remain low nationwide.

“There is an element of encouraging people to take responsibility for where they live and how they are protected. But recent events also illustrate the value of the re/insurance industry,” Nutter said.

“They are on the scene quickly, writing cheques and arranging temporary accommodation. In contrast, government funds take much longer to arrange and the amounts are always inadequate. All this highlights the protection gap and the fact that other solutions are available.”

Nutter added that the RAA is focused on the principle of risks currently borne by the US government being moved into the private sector across several sectors. A risk transfer programme for the Export–Import Bank of the United States has been explored, while secondary mortgage risk has been successfully transferred for several years now and this market is growing quickly.

“The reinsurance market is also supportive of terrorism risks being transferred. A number of risks the government is ultimately exposed to could be transferred and, especially when you look at the enormous capacity the capital markets potentially have through the ILS markets, the potential is enormous,” he concluded.

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