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Original Risk: A Society for Change Agents

Use capital markets & investors to release residual risks: ABIR’s Kading


The U.S. and state governments should take advantage of the current level of interest shown in insurance and reinsurance by the capital market to release risk held in residual markets and cede it to investors, according to ABIR President Bradley Kading.

Kading, President of the Association of Bermuda Insurers and Reinsurers (ABIR), was speaking at the Global Insurance Symposium. He called for insurance risk to be moved out of non-essential government insurance programs and into the private sector, saying that this is in the long-term best interests of taxpayers and consumers.

Kading cited the increasing interest in participating in the global insurance and reinsurance market shown by investors from institutional and capital market backgrounds.

“With the interest of pension funds, sovereign wealth funds and hedge funds in investing in insurance markets, it’s time for policymakers to take up the challenge and put this capital to work in downsizing non-essential government insurance programs,” Kading explained.

The capital markets has been eagerly snapping up any residual market risk which does get released in the form of catastrophe bonds and fully-collateralized participation in government insurance programs reinsurance renewals.

Kading explained how this would benefit taxpayers; “Government insurance programs expose taxpayers to assessment, debt and cross subsidies that benefit some at the expense of others. The National Flood Insurance Program with a debt of $24 billion is a poster child of what we should all seek to avoid.”

The onus lies with governments to address this issue and to take advantage of the appetite for access to the returns of reinsurance business by identifying where risks could be released to the private reinsurance markets.

“Policymakers and regulators should systematically review government insurance programs and identify regulatory impediments to moving risk to private markets. Keep the essential programs, but shift risk gradually as private sector interest materializes,” Kading continued, noting that US and global reinsurance regulation has largely allowed reinsurance markets to attract capital. “Policymakers and insurance regulators should act to remove red tape that keeps insurance risk in residual markets.”

The private sector interest is clear already. The capital market and the traditional reinsurance market are both well-capitalised and eager for access to more property catastrophe risk. With market conditions at their most conducive for cedents in years, the government opportunity to shift risk back into the private reinsurance market has never been better.

The U.S. government could take advantage of the interest in catastrophe bonds, for example, by choosing to issue its own as a way to gradually downsize residual risk markets and shift that into the capital market. A program of issuing a number of catastrophe bonds from different state and government insurance programs would be a diversified portfolio of government sponsored catastrophe bonds, a hugely attractive proposition for investors.

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