12 September 2017 Insurance

Value of reinsurance is under-reported

As Hurricane Irma continues to move through Florida, the Association of Bermuda Insurers and Reinsurers (ABIR) is keen to stress that the impact of the hurricane on the end consumer of insurance must not be forgotten.

“Something that is very under-reported is the value proposition of reinsurance,” said Brad Kading, president and executive director of ABIR. “All we hear people talking about is the impact of events on reinsurance markets, when the real question ought to be what is the impact on and benefits for consumers?”

Kading said that reinsurance means that claims are paid quickly and cedants are able to trade forward in spite of catastrophic losses. “That is the reinsurance value proposition—it provides liquidity, stability and resilience in markets. Harvey demonstrated that well and Irma will also demonstrate it, but it should be better reported.”

He stressed that policymakers don’t care about the impact of losses on reinsurers—that’s an investor story, not a consumer story. Instead, the industry needs to highlight the value of reinsurance in providing liquidity and stability, and in making consumer markets more competitive, with prices lower than they otherwise would be. The industry can also help close the protection gap and increase the purchase of private flood insurance in the US.

“The investor focus is wrong. The story needs to be turned around to tell the beneficial impact of reinsurance on consumer insurance markets. There’s a huge disconnect with the local population—they don’t care that a reinsurer is not going to meet its return on equity target or report a loss,” Kading said.

“What they care about is ‘how do I get the roof repaired on my house?’. The value of reinsurance is that the claims do get paid, even though there’s been a disaster.”

He notes that, thanks to its reinsurance coverage, the US National Flood Insurance Program (NFIP) will receive a cheque for $1 billion for Harvey.

“Due to the first ever NFIP reinsurance programme we can demonstrate the value of that reinsurance product. The payment provides liquidity and saves taxpayers from a larger burden,” Kading said.

He also pointed to the value of parametric products, where a trigger point results in a payment. The Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company will pay the government of Barbuda to aid in its recovery from Irma, Kading noted.

“That is a speedy payment and an important contribution to meet humanitarian and infrastructure needs. It’s a great example of a successful public-private partnership,” he said.

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