February 25th, 2016

Partnerships: The Way To Public Sector Risk Financing

Posted at 1:00 AM ET

The impact that catastrophic loss can have on the fiscal position and tax base of government entities across the globe is significant. Impacted areas can take decades to recover when economic recovery is limited. Approximately 73 percent or USD 2.7 trillion of natural catastrophe losses globally between 1970 and 2014 were uninsured. The creation of private sector pre-financing options will not only relieve the burden on taxpayers and in turn, public finances, but will migrate the management of these catastrophes to insurance and reinsurance companies where claims handling and risk management is core to their operations. This allows local economies to come back on line more quickly.

The role of government in the financing of risk varies widely from country to country. In many countries, government entities have elected to retain, assume or backstop insurance risk. Historically, these decisions have been driven by many factors.

Difficulties in securing affordable insurance for remote risks, such as earthquake or tropical cyclone, have led individuals to forgo coverage. Where private market insurance was available but constrained, some government entities provided facilities to offer insurance coverage directly to individuals. Usually such facilities were intended to act as markets of last resort. However, by charging premiums lower than those of professional insurers, many of these facilities have become markets of first choice. While the approach was designed as a solution to underinsurance and lack of availability of insurance, a significant gap remains between what government has been able to cover through premiums and the actual exposure it holds.

Heads of government, international trade organizations and private-sector risk bearers are seeking to re-examine roles and responsibilities through which societies can better manage these complicated risks. As governments across the globe examine new methods to manage and transfer this risk to the private sector there are many developments underway to support this changing paradigm. In addition to public private partnerships, an increase in capital entering the (re)insurance market and advancements in improving the measurability of risk have led to the introduction of innovative risk transfer solutions.

This report examines the shifting economic and risk landscapes that are driving public sector entities to consider new approaches to risk financing. We explore the increasing ability of the private sector to assume public sector risk and the important role technology plays to help stakeholders identify, evaluate and finance risk. In later sections in the report we highlight risk transfer solutions and mechanisms for terrorism risks, government and private sector initiatives for flood and US residual market facilities as significant providers of some of the most wind- and earthquake-exposed property insurance in the United States.

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