RAA eyes growth in cyber, flood, cannabis risks

Cyber, flood and cannabis risks are just three areas that could stimulate significant growth opportunities for reinsurers—but all also require some form of government intervention or regulation if they are to gain true traction and become valuable parts of the risk transfer landscape.

That is the opinion of Frank Nutter (pictured), president of the Reinsurance Association of America (RAA), the trade association for US property/casualty reinsurers, speaking ahead of the APCIA annual conference in Dallas.

The RAA lobbies for a regulatory environment that ensures its industry remains globally competitive and financially robust. It is also adept at bringing government and the private sector together in a way that facilitates risk transfer, opening up new markets for reinsurers while also benefiting policyholders. There have been several successful examples of this including in the way terrorism, mortgage and flood risk are all transferred.

Now, Nutter says that new risks are on its radar where it believes the right government support could again open up new markets. The first is cyber risk.

He stresses that the RAA is not advocating any specific proposal, because such a thing does not exist—yet. Rather, the fundamental question of whether government involvement would help this market develop is worth evaluating.

“More reinsurers are interested in writing cyber risk, but some leaders have suggested we explore whether a public-private partnership with government needs to be considered,” Nutter said.

“No one has come forward with a specific proposal. But I do agree that, in order to preserve and enhance a private market opportunity, we may need to define what role, if any, government should play,” he said.

“Maybe it’s for certain exposures, maybe government takes the risk at a certain level. Maybe government has a role in evaluating the risk. I am not sure. But cyber looks like a market that’s emerging, reinsurance companies are interested. But where is that line beyond which a private industry cannot play? Is there a threshold beyond which the government takes on the risk? I think the answer to that may become a priority.”

Legal or not?

Another area that clearly needs government involvement—albeit in a different way—is the rapidly growing cannabis industry. The US finds itself in the uneasy position whereby cannabis remains an illegal substance at the federal level—yet many states have authorised its recreational or medical use.

This has led to a growing industry. US-based companies are growing the drug, transporting it, distributing it, and selling it—at a state level. All these businesses need insurance, creating opportunities for reinsurers in turn. Yet insurers supporting these companies with insurance are deemed to have broken federal law.

A such, the RAA is part of a collection of groups looking to secure “safe harbour” at a federal level for insurers working with state-licensed cannabis-related businesses. Legislation has been passed by the House of Representatives several times. As yet, however, the Senate has rejected the bill.

Nutter hopes this will soon change. “We’re hopeful that the Senate will pass the bill this fall,” he said. “That would create a market opportunity for insurers and reinsurers. Most of these cannabis businesses have all the traditional insurance exposures but, because of the illegality of cannabis at the federal level, have been unwilling to write them.”

The third area of growth is one that the RAA has eyed for several years: it wants changes to the National Flood Insurance Program (NFIP) that would ultimately move more risk back into the private sector and make it more sustainable long term.

The NFIP is routinely extended by Congress on a short-term basis—usually for six months at a time. The RAA is pushing for fundamental reforms of the programme that would achieve two main aims: enhance its utilisation of the reinsurance markets, making it more resilient, and encourage the development of a private insurance flood market.

To do the latter, the RAA is pushing for what it calls a continuous coverage provision whereby consumers would be allowed to purchase private flood coverage but move back to the NFIP if needed without incurring a rate increase.

“There’s a growing but still nascent private insurance flood insurance market but this could be encouraged to grow through reforms to the NFIP. We advocate allowing people to test the private market but then return to the NFIP if required at the same terms they were on before. We are also looking at other ways to incentivise the growth of a private market. There are a number of reforms we suggest but the potential of this market is enormous.”

In addition to these areas of potential growth, there are some big issues on Nutter’s agenda—concerns, even. The first is the Florida insurance market where insurers and reinsurers continue to lose money, causing capacity to withdraw. A number of insurers have folded this year as a result.

“The challenges in Florida are because of a lack of substantive litigation reform,” he said. “It is a very significant market for cat risk so it’s a prominent issue. It’s pretty clear that the recent reforms weren’t significant enough. Even though the Florida renewal is not until next June, people are concerned the market is imploding. More legal reforms are necessary.”

The situation in Florida, while largely unique to that state, is partly indicative of a wider trend manifesting in social inflation, he says. Changing attitudes towards big business and social justice are resulting in higher jury awards, so-called nuclear verdicts and more class action lawsuits across America.

This creates a specific challenge for insurers and reinsurers because they largely rely on historic data to model and price risk, he says.

“Florida is a poster child for this and has unique challenges. But wider social inflation reflects societal attitudes. That is much harder to solve. But the industry’s business model is largely a retrospective one. If the fundamental dynamics change, as has happened with cat risk and climate change, that business model is challenged.”

The final item on Nutter’s agenda is wildfire risk. This has become a big problem in recent years, especially in states such as California. He explains that the RAA is interested in this issue because the solutions required need to be community-based—as opposed to looking at individual policies or risk management.

“It’s an area that the risk transfer industry, policymakers, insurance regulators and others are grappling with. The question is: how do you maintain viable insurance markets around a risk that is largely driven by climate change while also taking into account where and how people build? That is a big question for the industry.”