The tail risk that is inherent in the flood peril is one of the reasons the U.S. government has a role in flood insurance and reinsurance, but in time that tail risk could be displaced with the help of both traditional and alternative capital, according to Chubb CEO Evan Greenberg.
Speaking during the Chubb fourth-quarter earnings call, CEO Evan Greenberg discussed the role of the government in flood insurance and his belief that over time flood risk can be privatised with the help of all forms of reinsurance capital.
“The way the NFIP is crafted today, it discourages more private sector participation and the private sector can do much more than it is doing in terms of taking on flood risk,” Greenberg explained.
He sees the U.S. government as having a role in flood insurance risk in two areas currently, but at least one of those roles may disappear over time, he explained.
“Number one, for those who can’t afford flood insurance protection, that can’t afford to pay for it, but live in a flood exposed area, subsidising. That’s a social decision, and to subsidise those people because you can’t charge an actuarially sound rate, that I see as a role for government,” Greenberg said.
But for the private insurance and reinsurance market, “The industry should be charging actuarially sound pricing” he continued.
Explaining the other area that government plays a role in flood risk, Greenberg commented, “Number two, there is a tail on flood, that goes for a while, beyond the industries where-with-all or appetite and I see the government, like in TRIA or in crop insurance, playing a role.”
But the role of the U.S. government in flood insurance and flood risk is likely to shrink over time and it’s clear Greenberg’s opinion is that the private sector should be doing more right now, taking on as much of the flood risk from government that it can.
The U.S. government’s Federal Emergency Management Agency (FEMA) increased its use of flood reinsurance for the National Flood Insurance Program (NFIP) for 2018, growing its reinsurance program by 40% to $1.46 billion of protection.
But Greenberg calls for more to be done.
“I do think that overtime, given the global balance sheet and both traditional capital and alternative capital, that tail risk overtime could also be displaced, the private sector could displace the federal role,” he explained.
The NFIP reinsurance program so far appears to be a traditional reinsurance affair, although it’s difficult to know if there’s any alternative capital sitting behind the 28 private reinsurers that back it.
But it’s clear that a concerted effort to de-risk the NFIP with the help of both traditional and alternative capital, as well as different risk transfer techniques such as parametric triggers, capital market solutions etc, could accelerate the de-risking and transfer more of the flood tail risk into the private market.
If the private market can take on more of the risk, at actuarially sound rates, it would also enable insurers such as Greenberg’s Chubb to provide better flood insurance products to consumers on the front-end and perhaps reduce the other area of government involvement, of the subsidisation of flood risk.
The calls to de-risk the NFIP grow in volume and by leveraging the wealth of capital, structures and risk transfer tools that exist across both traditional reinsurance and insurance-linked securities (ILS), the role of the government in flood risk could be dramatically reduced.