Risk transfer recommendation baked into 2021 United States budget

United States Federal agencies should explore and employ risk transfer from private markets, such as insurance, reinsurance and capital market solutions, to transfer risks that American taxpayers are exposed to, an amendment to a key budget document will now state.

The U.S. House Financial Services Committee met last week, and part of their agenda was passing a number of budget related documents, including an agenda for itself in driving budget initiatives forwards.

An amendment was offered to this document by Rep. Blaine Luetkemeyer (R-Mo.) that calls for the U.S. Federal government to always consider risk transfer and insurance and if practical enter into agreements to reduce risks to taxpayers.

The amendment calls for risk transfer to be considered by any Federal agencies and departments bearing credit, guarantee or insurance related risks that could lead to American taxpayers becoming exposed to potential losses.

It calls on such agencies or departments explore risk transfer options and if practical, employ the most appropriate risk transfer solutions, as this can help to ward off or moderate the impacts of economic downturns and natural catastrophes.

Both the traditional insurance or reinsurance markets and the capital markets are cited as sources of this risk transfer and the National Flood Insurance Program is referenced as a specific example of an agency (FEMA) effectively embracing risk transfer.

FEMA has been accessing both reinsurance and capital markets for a number of years now, resulting in the agency having over $2.5 billion of risk transfer for the NFIP, split between reinsurance and catastrophe bonds.

The amendment also references other federal de-risking efforts, such as the Federal Housing Finance Agency and the Export-Import Bank, which along with the NFIP de-risking show that Federal agencies can effectively manage their risks, transfer them to private markets and therefore minimise potential losses to their portfolios and remove potential cost burdens from taxpayers.

Luetkemeyer, along with other representatives, has made a number of efforts in recent years to get risk transfer codified within U.S. federal laws, but most have suffered challenges or been pushed down the priority list meaning they haven’t been properly debated or addressed.

By adding the need to explore risk transfer to this agenda it could mean that every budgetary discussion of this key Committee features a consideration of the risk involved and whether it can be transferred.

Of course, that should really be standard government practice, that any agency, department or initiative considers the risks it may bear or encounter, as well as how it could better manage, mitigate and transfer them.

The U.S. government, like many others, carry significant risks, climate and catastrophe included, that could effectively be mitigated through risk transfer, taking the burden off budgets and ultimately taxpayers.

With advanced insurance solutions, ample reinsurance capital, and of course insurance-linked securities (ILS) markets, all able to assist in this de-risking journey, there are a wealth of options that could be considered.

The hurdle remains the burden of cost. As we all know, paying premiums for coverage is not always a budgetary priority unfortunately.

But that is gradually changing, all over the world, and governments are now engaging in risk transfer more than ever before, while its discussion has also risen in the ranks of leaders across the globe, particularly in relation to severe weather and climate risks.

Luetkemeyer’s amendment was approved by the House Financial Services Committee and supported by its Chairwoman Maxine Waters (D-CA).

Waters expressed support for the amendment, but noted that risk transfer mechanisms are untested in a recession environment.

Perhaps in a government setting, but certainly not in the private insurance, reinsurance and capital markets.

Frank Nutter, president of the Reinsurance Association of America, an organisation that is a committed proponent of transferring risk from the Federal government to the private sector commented, “RAA commends Congressman Luetkemeyer and Chairwoman Waters for their continued leadership in supporting transferring risk from Federal programs to the private sector. Risk transfer programs will 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.”