Many more US agencies could benefit from reinsurance: RAA’s Nutter

As the reinsurance industry continues to struggle to find sustainable growth, there remain several US government bodies that would benefit from moving risk into the private sector.

The industry should explore how this could be enabled, in the same way as the government flood risk programme has succeeded in transferring large amounts of risk to reinsurers.

That is the view of Frank Nutter, president of the Reinsurance Association of America (RAA), who told APCIA Today that a priority of the body was to lobby for and advocate changes in laws or regulations that would allow government bodies to work more closely with reinsurers and transfer risk into the private sector.

“The reinsurance industry is always seeking growth and we at the RAA are an advocate body for the industry. We see a lot more potential for government bodies to transfer risk into the private sector.

“It is just a question of education and getting the right structures in place,” he said.

Nutter notes that the trailblazer for this ideal has been the National Flood Insurance Program (NFIP), controlled by the Federal Emergency Management Agency (FEMA). The RAA helped secure a change in the law to allow the body to transfer risk into the private market. After completing a test deal in 2016, it now transfers some $1.5 billion of risk into the private markets annually using a mix of traditional reinsurance and insurance-linked securities (ILS).

Several other government bodies could benefit from similar structures. The Export-Import Bank of the US (EXIM), the official export credit agency of the US, is one candidate. EXIM completed a $1 billion reinsurance deal in April 2018, but the bank has not completed a deal since, mainly because of internal changes in personnel.

Its very existence needs to be reauthorised by Congress by November 21, the same date as the NFIP next expires.

Nutter said the RAA is pushing for two things: first, the reauthorisation of the bank itself; second the transformation of the risk transfer programme into something permanent that can take place on a regular basis and even grow.

Fannie and Freddie

Fannie Mae and Freddie Mac, the two US government-backed financial institutions that provide liquidity to the US mortgage markets by buying mortgages from lenders, also have the potential to work more closely with reinsurers, Nutter believes. While both currently manage robust risk transfer programmes into the private sector, the US government has indicated it may seek ways of introducing more private money into their capital structures.

“They already work with reinsurers on their risk transfer programmes and reinsurance is used as a capital tool by many insurers,” he said.

“Some of the products that reinsurers provide could be used in this context with Fannie Mae and Freddie Mac. I could see reinsurers playing a role in that.”

Next, there is the Overseas Private Investment Corporation (OPIC), a US government agency that helps US companies invest in emerging markets, partly by offering political risk coverage. In November 2018, OPIC and Liberty Mutual signed a $1 billion risk-sharing agreement to facilitate private sector investment in the world’s most challenging markets.

But, Nutter said, the body could do more and “they are open to the idea”, he said.

Finally, the Small Business Administration, which provides support to small businesses and entrepreneurs, has formally requested ideas from the private sector on how it might work with the private sector and share risks.

“They are open to receiving ideas,” Nutter said. “In the case of most government bodies, some form of change of law or regulation or statutory change is usually required to allow such risk-sharing with the private sector.

“That is where the RAA comes in; we try to advocate these solutions and propose exactly what is needed to make them a reality,” he said. “The result is less risk for the US government and growth for reinsurers.”

All this is in addition to further progress that could be made on transferring flood risk into the market (see APCIA Today Day 1).

Earlier this year, banking regulators the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, took an important step forward by making it clear that banks can accept flood insurance policies from the private insurance market—something that would help the private flood insurance market to grow.

Another step forward would be establishing clarity that a homeowner leaving the NFIP could opt to return to using it without losing their status and any incentives they may have had within the programme.

Nutter added that the RAA is keen to see certainty around the future of the NFIP. It has been extended on a short-term basis around 10 times and is due to expire again on November 21.

“Our goal is to achieve a permanent extension of the flood programme. We think five years would be reasonable. But we need to find ways for the private market to take on more flood risk,” he concluded.