“Real opportunity” for ILS market to help US government de-risk: Hensarling

Speaking at the SIFMA Insurance and Risk Linked Securities Conference in Miami yesterday, former U.S. Congressman Jeb Hensarling explained that the ILS market has a “real opportunity” to assist the United States government in shifting more risk away from taxpayers.

Hensarling explained that the insurance-linked securities (ILS) market and private insurance or reinsurance markets in general, can help the government to de-risk its book, something that FEMA has made progress towards in recent years.

FEMA has of course de-risked the National Flood Insurance Program (NFIP) to the tune of around $2.53 billion at this time, thanks to its use of reinsurance and catastrophe bonds.

However, Hensarling feels this could have moved faster and more risk could have been privatised, to help reduce the risk to the taxpayer balance-sheet.

He explained that the example set by FEMA in de-risking the NFIP using reinsurance capital, while not moving as quickly as Hensarling would have liked, “can set a precedent for other government programs.”

While “what’s most important is the billions of dollars that has been transferred off the taxpayer balance sheet,” Hensarling also stressed the need for this to also be supported by increased private market participation in flood risk at the primary insurance end of the scale as well.

But on the bigger picture opportunity of helping government de-risk other programs, Hensarling pointed out that there is work to do in areas such as terrorism risk, plus in the hundreds of other government agencies and programs that have yet to embrace de-risking.

He highlighted the challenges in encouraging government agencies to embrace risk transfer, citing the need for legislation to support this and how difficult and long the process can be to get to that stage.

“By one estimate, there are 10,000 federal government programmes spread across the 600 federal agencies. Let’s just say there is a real growth opportunity here,” Hensarling explained, saying that the government is a major insurer of risk but that only three agencies have ever engaged in private market risk transfer so far.

He highlighted the fact that deficits in government budgets could encourage a greater focus on de-risking.

Saying, “I’m at least encouraged that people will once again say that some risk has to be transferred off the balance sheet.”

But to get the government agencies more comfortable with the use of insurance and reinsurance capital, including insurance-linked securities (ILS), the market has to engage and build relationships.

“Clearly establish as many relationships with members of Congress as possible,” Hensarling suggested.

“Be prepared for there being a change in the sensitivity of the electorate to the deficit, and if so, be part of the solution, come with a proffered solution in hand.”

There’s a nervousness that insurance carriers may pull out of high-risk areas, such as flood prone states, having been the experience before.

“There has been a distrust that when things get bad, that private insurance is going to move out,” Hensarling said. “ILS and reinsurance can help convince people that there can be a private market that doesn’t necessarily pull out.”

“We have more sophisticated modelling, we have great capacity. We have more sophisticated global reinsurance markets. We have the advent of ILS.

“So to come and say we are part of the solution, to make sure that private insurance can come in and always be there, is an important message to them,” he explained.

While the opportunity is real and significant, Hensarling also warned that such big ideas can take a long time to gain traction in government circles.