September 10th, 2018

Closing the Gap: Public Sector Risk Financing Solutions Increase Community Resiliency - GC@MC Commentary

Posted at 1:00 AM ET

clark_jonathan-headshotJonathan Clark, Head of Public Sector Specialty, U.S.

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  • Only 33 percent of economic disasters are alleviated through (re)insurance
  • Recent functional risk transfer mechanisms use advances in data, analytics and modeling
  • Guy Carpenter and GC Securities* are working with over 100 public entities around the globe

Recently a variety of stakeholders have expressed the need for more resilient communities that can stand stronger against volatility and shocks to their environments – shocks that are often caused by catastrophic events and the interaction of economic development with inadequate risk management. Concurrently, there are industry concerns around the protection gap (gap between insured and uninsured losses) and the steps necessary to help people recover when their lives are up-ended by unforeseen events, believes Jonathan Clark, Head of Public Sector Specialty, U.S., Guy Carpenter

Insurers will want to consider how they can make a difference on this issue. “For a number of years, managers across our industry have debated the issues surrounding the protection gap. While we observe well-intended discourse, studies indicate limited inroads have been achieved,” explained Clark. “According to work undertaken by the Geneva Association, (1) it is well documented that only 33 percent of economic disasters are alleviated through (re)insurance. There has only been modest change over the past 30 years. Significant protection gaps exist across property, agriculture, cyber, healthcare, pensions and life risks.”

A handful of (re)insurance leaders have observed that the industry jeopardizes its relevance if it does not make progress on these issues. “Earlier this year,” Clark continues, “Guy Carpenter specialists attended a seminar focused on public-private partnerships as a means of building resilience – we were struck by the fact that out of over 150 participants only two worked in the insurance sector. The industry needs to understand buyer needs and recognize the barriers to overcome in positioning risk transfer solutions.”

Our industry now has access to analytics and tools that facilitate risk transfer to the broader capital markets. Insurance-linked securities coupled with available (re)insurer capacity can provide abundant risk capital to benefit our communities. Some industry participants are pushing ahead with initiatives to reduce the adverse impact that un-funded catastrophe risk has on community economic vitality. “Recent functional risk transfer mechanisms are using advances in data, analytics and modeling to spur change in the landscape around flood, wildfire and other perils,” Clark noted.

They include:

  • Cal Phoenix Re (PG&E): An August, 2018 catastrophe bond placement represented the first pure wildfire transaction designed to protect a California utility. (Wildfires have devastated parts of Greece and the United States over the past 12 months, and represent significant exposure to communities around the globe.)
  • FloodSmart Re (Federal Emergency Management Agency): In August 2018 the U.S. federal government accessed the catastrophe bond market for the first time to supplement its financial backing of the National Flood Insurance Program. (Greater flood insurance penetration is happening by way of new modeling tools that are coming on-line in the United States.)
  • Pandemic Emergency Financing Facility (International Bank for Reconstruction & Development): In 2016/2017, the World Bank, collaborating with the World Health Organization with support from Japan, Germany and private sector partners, established a facility that provides funding for response efforts to help prevent rare, high-severity disease outbreaks from becoming more deadly and costly pandemics.

In addition to these transactions, Guy Carpenter and GC Securities are working with over 100 public entities around the globe, seeking to narrow the protection gap by bringing private sector risk capital to bear. “New partnerships are required along with new ways to tackle complex matters and build solutions that do not always fit neatly into traditional risk transfer solutions. We are committed to expanding our industry’s role in mitigating risk for public entities and reducing taxpayer burden for un-funded exposures,” Clark concludes. “Bringing functional insurance supported by stable reinsurance and placing the correct form of risk capital at a customer’s disposal are key components of an effective and efficient resilience strategy. We wish to work with like-minded stakeholders across the industry to expand these engagements to the benefit of our communities.” Print Click here to register to receive e-mail updates >>

Note: 1. Geneva Association: “Understanding and Addressing Global Insurance Protection Gaps” – April 2018.

*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. **Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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