The entry of new and alternative capital into the reinsurance market, as well as the growth of new instruments such as catastrophe bonds and other insurance-linked securities (ILS), provide an opportunity to policymakers as well as re/insurers.
We often write about the opportunity that all this new, third-party investor or alternative sourced, capital presents to those looking for risk transfer, be they insurers, reinsurers or corporates looking for direct disaster risk financing and transfer.
We’ve also written in the past that there is an opportunity for sovereign risk transfer to leverage the interest in risk related returns, to use ILS capital from investors and structures such as catastrophe bonds to transfer sovereign natural disaster risks to the capital markets.
There is also an opportunity for policymakers to capitalise on the interest investors show in accessing the returns of insurance, reinsurance and catastrophe risks. In a recent speech in New York, Brad Kading, president of the Association of Bermuda Insurers and Reinsurers (ABIR), outlined the opportunity that policymakers are currently missing to leverage new capital to prevent government budgets and insurance programs from facing deficits.
“New reinsurance capital affords policymakers with a great opportunity to prevent deficits in government insurance programs that will saddle taxpayers with extra costs,” Kading explained to the New York audience.
With so much capital, both traditional reinsurance capacity from reinsurers awash with excess capital, as well as alternative reinsurance capacity and ILS capacity from capital market and institutional investors, available policymakers perhaps face their best opportunity to remove the burden of government insurance programs from their budgets.
However, Kading foresees some policy and regulatory matters potentially closing the window on this opportunity for policymakers. Kading continued; “Unfortunately, badly designed international group capital standards or increased protectionist measures could destroy this opportunity and burden taxpayers with financing unnecessary government insurance programs.”
“We are at a crossroads. Capital markets are enormously interested in providing reinsurance capital. However, some governments around the world have proposed protectionist regulatory measures that dictate limits on reinsurance operations, restrict cross border trade or mandate cessions to state controlled enterprise — each of which may drive capital out of the business,” Kading said, citing data from the Global Reinsurance Forum.
Kading is keen to ensure open-borders for reinsurance business and ILS capital, as well as encouraging competition in order to make the most of more efficient capital sources. “Policymakers can resist the protectionist path and make markets more competitive, or take the path of “ring fencing” local markets by limiting trade and dictating locally held capital. The latter will make insurance products more expensive and markets less competitive,” he commented.
So policymakers, politicians and regulators have an opportunity right now to leverage risk capital like never before, in order to better protect their budgets and to even shift government pooled risk off their budget and into the private risk transfer markets. At the same time they could also hinder the development of open, efficient and truly international risk transfer markets, if an overly protectionist approach to regulation was taken.
It is to be hoped that policymakers recognise this opportunity and embrace it, by leveraging the strengths of the reinsurance and risk transfer markets as well as new, third-party, efficient ILS capital, to get risks off their own books and to ultimately reduce the impact of catastrophe losses on their own taxpayers.