Bill calls on U.S. to transfer Government risks to private sector capital

A piece of legislation that is passing through the U.S. government houses at the moment calls on the United States government to be more proactive in transferring insurance related risks from federal programs to the private market.

H.R. 5381, also known as the “Government Risk and Taxpayer Exposure Reduction Act of 2018” or the “GRATER Act of 2018” has already been passed by voice by an important government committee, the House Oversight and Government
Reform Committee, and now insurance and reinsurance industry organisations are adding their backing to aid the bill’s passage.

The bill calls for the U.S. government to minimise credit, guarantee, and insurance risk associated with all Federal Government programs, by transferring the risk to the private sector at market terms.

It would make this policy and mandate that government entities looked to reduce risk within Federal programs as much as possible, using “a variety of financial instruments in a sustained and transparent manner.”

In addition the bill would mandate that it becomes “the policy of the United States to utilize to the maximum extent possible, the use of private risk capacity, consistent with the goals and purposes of such programs and awards.”

If enacted, those Federal government entities that control programs that have exposure would have to develop risk management and transfer plans, to demonstrate how they intend to minimise risk to taxpayers and to the government as a whole.

Insurance and private market risk capacity should be used to help in de-risking the U.S. government, ensuring that programs can be sustainably run and risk removed from creating a burden for the taxpayer, under the bill.

The bill itself is short and sweet, simply putting the onus on the Federal program owners to operate a robust strategy of risk management and risk transfer, leveraging private market capacity, which could include both insurance or reinsurance markets, as well as the capital markets through insurance-linked securities (ILS).

Industry organisations the Reinsurance Association of America (RAA), the Council of Insurance Agents & Brokers (CIAB), alongside a range of other interested consumer and taxpayer linked think-tanks and non-profits, have together called for the bill to be passed urgently.

In a letter to U.S. House of Representatives Speaker Paul Ryan and Minority Leader Nancy Pelosi, the group say that the risk transfer the bill would mandate would see federal program beneficiaries, taxpayers, federally backed programs and the private sector all benefiting from the bills successful passage.

“The bill would require an evaluation of federal risk and potential risk transfer opportunities while encouraging initiatives to transfer federal risk to the capital markets and reinsurance where appropriate and authorized by law,” the group explained.

The group’s letter continues, “If the bill is fully realized, federal program beneficiaries likely would benefit from improved program risk management and funding certainty, particularly in the aftermath of anomalous events resulting in the need for unanticipated and unappropriated, increased costs. Taxpayers would be relieved from carrying the full financial burden of risks currently retained by the federal government. The capital markets and reinsurance can help federal programs and operations improve risk-management, resilience, and to deleverage through risk-sharing, reducing both liability and cost.”

The ability of reinsurance and capital markets to absorb the exposures that government put on their taxpayers, through self-insuring, is not in question. The issue has always been the motivation to transfer that risk and to pay for it, which governments have largely chosen to neglect over the years aside from specific areas of exposure.

By mandating that federal entities have a risk management and transfer strategy to reduce risk to taxpayers much more of this self-insured risk could be released to the private markets, with the ILS market likely to benefit from the opportunity to absorb its share.

The group of organisations highlight the example of FEMA’s National Flood Insurance Program (NFIP), saying that the way it has utilised reinsurance and capital markets to de-risk and then benefitted from a payout after hurricane Harvey, shows that private market solutions to transfer disaster risk work and reduce the exposure the federal government would more typically retain.

The NFIP’s reinsurance program, alongside other examples such as the mortgage GSE’s use of reinsurance and capital markets, as well as the EXIM Bank’s risk transfer arrangements, are all prime examples of the benefits this bill could bring.

“These programs potentially can serve as a model for other federal programs and risks ultimately borne by the taxpayer,” the group wrote.

Governments typically retain huge amounts of exposure to natural catastrophes and other risks, with the exposure often ending up falling on the taxpayer when the worst happens and events cause a drain on the economy.

By proactively assessing these risks, creating strategies and plans to manage and build resilience to them, and utilising the financial markets to transfer the risk to entities better able to absorb it, the U.S. government would be doing its taxpayers a service, while also preparing itself for a more sustainable future.

The role of insurance, reinsurance and ILS capital, as well as instruments such as catastrophe bonds, is clear as a capacity source to help government’s de-risk themselves and this applies globally.