State of U.S. federal government finances could lead to risk transfer opportunities

by Artemis on June 22, 2011

There’s a very interesting article on the Insurance Day website in which they quote from Willis Chairman and CEO Joe Plumeri’s recent speech at the Insurance Day Summit Bermuda event. In his speech, which you can read in full on the Willis website, Plumeri highlighted the dire financial state of the U.S. federal governments finances and discussed some opportunities that could arise for the re/insurance and risk transfer sectors.

Plumeri discussed the huge financial deficit that the U.S. government is currently operating under and suggested that the lack of finances could contribute to a reduction in the governments desire to participate in re/insurance facilities and backstops.

Public provision of insurance products may no longer be sustainable, suggested Plumeri, leaving the private sector free to resume its role as provider of these products. As the public sector retreats from insurance the private re/insurance market will find that opportunities present themselves.

Plumeri cited some examples; government discussion about scaling back the Terrorism Risk Insurance Act of 2002, the lack of political will to take on risks such as windstorms and tornadoes, the government realisation that the National Flood Insurance Program is becoming unsustainable and the energy sector (particularly the Deepwater Horizon disaster) which the government struggles to manage. All these present opportunities to the risk transfer sectors.

Anyone who reads Artemis regularly will know that we’re in agreement with Plumeri about the opportunities the risk transfer market has to provide expertise to address these issues. We’ve written at length about issues like the flood insurance program and state windstorm plans and suggested that alternative risk transfer mechanisms and capital markets risk transfer seem to be suitable methods that should be applied to these difficult risks.

Whether the risk transfer market could ever replace the government backstops completely is debatable, however they can certainly shore up the backstops and provide top layers of cover enabling the government to focus on making the core facilities sustainable. Public-private partnerships seem to be the answer to enable these facilities to provide reasonable levels of cover right now. Use of risk transfer tools such as catastrophe bonds, derivatives and other hedging mechanisms seem sensible to transfer a portion of the risks to capital markets investors as well. Investors would likely be keen to take on the top layers of risk from these publicly run reinsurance facilities, particularly if the federal government was still involved.

Of course, being a government issue changes could take time, however we have seen some steps taken this year as windstorm pools have returned to the private reinsurance market for cover (examples of such changes from Texas and Florida). The important thing is to ensure that the private risk transfer market has a voice in any discussions and helps the federal government to understand the role it could play in the future if they allow it.

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