Governmental support needed to break into new risks: Stephen Catlin

Some industry experts and leading insurance or reinsurance firms attribute the sector’s dependency on governments as a sign it’s failing, but Stephen Catlin feels the support of the state is vital if we are to adequately protect against major, extreme events and new risks.

Speaking at the recent 2015 Global Insurance Forum in New York, Executive Deputy Chairman of XL Catlin, Stephen Catlin said that he disagrees with the views of some large re/insurers that believe the industry is failing when it calls on the support and backing of governments.

“We fail if we take on exposure beyond our capital, and our capital is not big enough to cope with some of these extreme events. The sooner we put our hands up and say so, the better,” explained Catlin.

Catlin’s point is an interesting one, and brings the lack of, or need for greater partnerships between the public and private sector to improve extreme disaster resilience and mitigation efforts to the forefront of industry issues.

It’s also interesting, as the reason the convergence of reinsurance and capital markets occurred, including the development of catastrophe bonds, ILS and other risk transfer instruments, was due to an understanding that the traditional market alone could not bear the losses from the most extreme events.

The argument often stated is that using government or taxpayer funds when dealing with insurance and reinsurance projects help’s to ensure any significant changes in the market don’t have a negative impact on taxpayers. However, in order to make insurance affordable sometimes government support may be the only route.

While some might feel the insurance, reinsurance and even insurance-linked securities (ILS) market’s rich, sustainable capital base and global reach can meet the demands required to protect against the world’s most extreme perils, for others the bigger, longer-term picture is what’s most important.

And according to some industry experts, including Mike McGavick of XL Catlin, while the wealth of alternative and traditional re/insurance capital in the sector is likely too much for the current product set, it’s not close to the amount needed for the threats the industry should really be trying to solve.

For that, according to Catlin, governmental support is necessary, as the potential economic losses from a terror, cyber or extreme weather-related catastrophe event, in a world that’s rapidly increasing in value and unprecedented interconnectedness, is likely to far outweigh the current capital base.

Professor of Decision Sciences and Business Economics and Public Policy, Howard Kunreuther of the Wharton School, University of Pennsylvania, joined Catlin during this session of the Global Insurance Forum, also noting the important role the public sector can play in managing and insuring extreme risks.

He explained that public/private sector relationships are a must in the area of building disaster resilience and reducing losses, and that the insurer “protects those who cannot afford to invest in protective measures, and there has to be a public sector role for providing protection to this industry, to private insurers against catastrophic losses that can’t be handled by the private reinsurers and the insurance industry.”

Examples of when public and private sector partnerships can work to provide needed re/insurance protection can be seen with the Terrorism Risk Insurance Act (TRIA) and the National Flood Insurance Program (NFIP) in the U.S., and Pool Re and Flood Re in the U.K.

Each of these schemes utilises the knowledge, capabilities and financial power of both public and private sector entities to ensure protection for terrorism risks (TRIA and Pool Re) and exposure to flooding (NFIP and Flood Re).

However, the ultimate goal should always be to transfer whatever risks can be covered affordably into the private sector, thus reducing reliance on government funds and the potential for taxpayer assessment. Florida is a prime example of this happening after years of public support.

Despite initially requiring the backing and support of the government to get each of the mentioned projects up and running, over time, as the private sector becomes comfortable and adjusts to the risks, a greater portion of the risk moves into the private sector, steering away from taxpayers and ensuring self-sustainable development.

And this would surely be the ultimate goal for emerging, large-scale risks that the executives at XL Catlin have been discussing. Although, for exposures as large as terrorism and cyber perhaps a certain level of governmental support will always be required, as the potential losses and interruption to business chains could be of an unprecedented scale.

The key may be in enabling government support of risk transfer backstops for new mega-risks, but with clear plans to transition towards private sector involvement as quickly as feasible. The ultimate goal should remain getting affordable risk transfer, priced commensurately with the risks, to the people and companies that need it as quickly as possible.

Public – private partnerships are a great way to speed up this process, of breaking into new and emerging risk classes, and have a key role to play, but still, enabling private markets to finance risk transfer, while maintaining accessible pricing, should still remain the ultimate goal.

Perhaps the secret is in the reinsurance industry learning better how to engage with governments and how to help them to structure risk transfer and insurance facilities with clear exit plans for taxpayer funding.