Risk-based pricing is best way to manage the burden of flood losses
Risk-based pricing of flood risk with the private market playing a prominent role in managing and insuring this risk represents the only sustainable solution that can remove the burden from the US taxpayer in the long term, Eric Andersen, chief executive of Aon Benfield, told PCI Today.
He said the industry may have to prove to policymakers it would be committed to this market long term, but advancements in flood modelling techniques mean that the private sector has the ability to play an important role in this market, helping to close the protection gap and removing the burden from the taxpayer in the process.
“Some say the government system is failing yet at the same time stopping the private market innovating in this area,” Andersen said. “There probably will be a role for the National Flood Insurance Program perhaps for those who cannot pay but we need to get back to the drawing board on this and leverage what the private sector can offer.”
He added that the way the re/insurance industry has conducted itself in the aftermath of the recent hurricanes also helps make the case for the value its products bring to society and the fact they could be utilised in other areas.
“The industry has taken a pretty hard shot but it has been able to trade forward and pay claims quickly with no disputes, no downgrades, no drama,” he said. “A significant amount of cash has already passed from reinsurers to insurers to consumers and the value of the product is there for all to see.
“Insurers could not write this business without reinsurance. In some ways it is a shame that discussions have turned so quickly to rates and potential increases instead of the fact that many reinsurers have been so supportive to their clients and made early payments to help the situation.”
Andersen believes the industry has the ability to take risks away from the government—and ultimately the taxpayer—in many other areas. The way the mortgage reinsurance markets have developed in recent years is a good example of this in action, as is the way the private market has helped depopulate Citizens, the Florida Hurricane Catastrophe Fund.
He believes there are more areas that can be explored. “There is a lot our industry can help with but equally these are not always easy problems to solve,” he said.
“For the industry to remain relevant it has to tackle these problems. Primary insurers are getting better at managing their risks so “Reinsurers must partner and help solve new problems.”, or I am not sure where it will be 50 years from now.”
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