Here we review recent GC Capital Ideas posts on the competing interests between the private sector (re)insurers and the public sector and how the two recognize the benefits of working together for public sector risk financing.
Posts Tagged ‘macroeconomic’
Here we review recent GC Capital Ideas posts on some of the drivers behind public entities considering new approaches to risk financing.
The National Flood Insurance Program (NFIP) is the primary underwriter of flood insurance policies in the United States. The program was established in 1968 through the passage of the National Flood Insurance Act.
For people living at high risk of flooding, finding affordable home insurance is becoming increasingly difficult and the problem is likely to get worse without action. The Association of British Insurers and the UK government formulated a plan following large scale flood events that highlighted the impact of severe flooding on homeowners and communities. The UK government’s preferred approach was the introduction of legislation that would create a flood reinsurance scheme - known as Flood Re - to help support households at highest flood risk with minimal market distortion. The households will be able to access affordable cover through the competitive home insurance market with a managed transition to more risk-reflective pricing over a 25 year period. The scheme provides support in the parts of the home insurance market that need it, which is likely to be around 2 percent of customers living in areas with the greatest risk of flooding. The Flood Re model depends on a statutory levy paid for by the UK insurance industry.
A number of countries provide for government supported terrorism risk transfer solutions to manage global threats of terrorism. The actual mechanisms employed are a spectrum between loan and direct support, as illustrated in the chart below.
Community-level insurance programs are clear examples of industry innovation that can serve as the switch to initiate broader market change. These utilize index insurance products and pay out benefits if a pre-determined event occurs (a quake with an intensity of a certain level, or a certain rainfall level) (1). Such products provide solutions for many different types of stakeholders:
The 2015 Global Insurance Forum addressed the topic “Filling the Protection Gap” (1). During the conference, key speakers noted the growing divide between the economic losses societies are facing and the role of the insurance industry. Many (re)insurance leaders believe the industry can play a significant role in a rapidly changing global risk landscape with pre-loss financing solutions designed to spread risk, relieve the burden on public finances and improve the resiliency of communities.
Insurance marketplaces that are stable and viable in the long-term succeed when insurers offer policies and coverages at premium rates that are appropriate and are subject to the requirements and standards of not being excessive, inadequate or unfairly discriminatory. At the same time, premium rates should be balanced and take past and prospective loss and expense experience into consideration. When these factors are not successfully accomplished, a public sector solution often emerges.
Differing approaches between the accountability and transparency required of public entities and near term profit expectations of the private sector can result in culture clashes. (Re)insurance support is a function of profit potential over time. The following factors should be considered to align the competing interests of public and private sector entities:
Identifying, prioritizing, selecting, executing and monitoring results of risk management projects are essential. As noted by the US Government Accountability Office in their post Hurricane Sandy review, an investment strategy would help the Federal Government enhance resilience for future disasters. Unless a clear risk-return framework is established, the opportunity to reduce publically held exposure will be challenging and the inertia around the status quo could endure until loss events occur that force reactionary funding from the public sector (1).