The Export-Import Bank of the United States (EXIM), the official export credit agency of the U.S. and a provider of trade credit insurance, financing, loans and guarantees, is looking to expand on its use of reinsurance risk transfer and is also looking to what the capital markets can offer in this regard.
The EXIM Bank already has a reinsurance program in place as part of its risk transfer and hedging arrangements, having secured a $1 billion tower of coverage from market leading reinsurance firms including leaders XL Catlin, Liberty Specialty Markets and Everest, alongside a group of 10 reinsurers, with the assistance of broker Aon.
That reinsurance program, entered into in early 2018, provided $1 billion in loss coverage for some of EXIM’s portfolio of large commercial aircraft financing transactions.
It’s not a typical risk that you’d see in the insurance-linked securities (ILS) market, of course, but now the EXIM Bank is looking to expand its use of reinsurance capacity and the capital markets is a provider it will naturally explore.
The EXIM Bank has a request for proposal and quotation out in which it is looking for specific expertise on the development of risk sharing structures related to the reinsurance industry and capital markets.
As well as structuring, the EXIM Bank is also looking for support on placement of structures into the reinsurance or capital markets, pricing evaluation, assessing offers from reinsurers and capital markets, as well as administrative support for the lifetime of any risk sharing arrangements between EXIM and reinsurers or capital markets.
EXIM said that while it currently has no specific new statutory authority to expand its reinsurance and risk transfer arrangements, it does have broad authority under its own rules to engage in reinsurance, coinsurance, and other forms of risk-sharing.
With this expansion of its reinsurance and risk transfer, EXIM hopes to reduce the probability of exceeding a 2% default rate at a range of probability levels, increase trade finance by “crowding-in” either reinsurance and/or capital markets, and identify potential core partners for risk sharing with EXIM.
The coverage of more of the EXIM Bank’s risk is seen as one of the protection gap opportunities in the United States, where currently a significant amount of risk is not transferred to private markets and remains a taxpayer related risk.
By opening up more of the reinsurance and capital markets to absorb this risk, the EXIM Bank can reduce the financial threat to taxpayers and better protect itself, making its programs and products more robust in the process.
The Reinsurance Association of America expressed support for the EXIM’s intention to expand its reinsurance risk transfer pilot program.
“Government risk transfer programs are fundamental in helping to protect taxpayers from the financial risk in these programs,” the RAA explained.
Frank Nutter, president of the Reinsurance Association of America commented on this, “The RAA has long worked with various government agencies, including the National Flood Insurance Program (NFIP), the Export-Import Bank of the U.S. (EXIM), and government-sponsored enterprises (GSEs), including Fannie Mae and Freddie Mac) to consider transferring risk to the private sector. The RAA applauds EXIM’s decision to further expand their reinsurance risk transfer program to the private sector. Risk transfer programs improve Federal program risk analysis and management, while easing the financial burden for risk now borne by the Federal government and ultimately, the American taxpayer.”
There is no certainty that the EXIM Bank will find appetite in the insurance-linked securities (ILS) market for the risks it holds. But if creatively structured, there may be a level of exposure that proves attractive to certain ILS funds or ILS investors that follow more diversified strategies and looks for a broader range of risk investment opportunities than pure catastrophe risk alone.
It’s encouraging that the EXIM is looking to the capital markets though, as it does mean there will be an opportunity to provide feedback to this process for the ILS market and any interested parties that may find this diversifying risk appealing.