Should There Be A National
Reinsurance Catastrophe Pool ?
May 8, 2006
Mary Z. Seidel
Reinsurance Association of America
Overview of Speech
-
Who is the RAA and General Description of RAA position
on Federal Reinsurance Programs for Natural
Catastrophes
-
Review of 2004-2005 Hurricane Season and Impact on
Reinsurance Industry
-
RAA Position on Federal Reinsurance Programs for State
Cat Funds
•
General Observations
•
Specific Concerns with H.R. 4366
-
Political Prospects for Federal Program
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RAA Membership
Important in Context of Debate on
Federal Role
- RAA represents U.S. reinsurance underwriters and brokers.
All members are U.S. companies, although 80% are
foreign-owned.
- RAA members are at the pulse of the global reinsurance
marketplace.
- RAA Member Companies write 70% of the reinsurance ceded
in the U.S.
- RAA also represents non-U.S. reinsurers, U.S. reinsurers that
do not qualify because of size, and life reinsurers.
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RAA Membership
Important in Context of Debate on
Federal Role Cont’d
- RAA believes natural catastrophe risk is insurable
in the free market.
- Federal role should be limited to truly catastrophic
event, such as $100 billion.
4
Insurance Industry Still Vibrant
Despite Record Events
- Eight of the most expensive disasters in U.S.
history occurred over the last 4 years.
- In 2004 four major hurricanes, $30 billion in
insured losses, no insurer or reinsurer insolvencies,
limited impact on capacity and pricing.
- 2005 was a year of unprecedented insured losses in
terms of frequency and severity.
• 27 named hurricanes and tropical storms set a
new record for $80 billion in insured losses.
• The Big Three: Katrina, Rita and Wilma
produced losses estimated as high as $60
billion.
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Insurance Industry Still Vibrant
Despite Record Events Cont’d
• Reinsurance industry absorbed approximately 50% of
these losses. Played critical role in providing stability
in the insurance marketplace.
- Solvency Impact – no major insurer or reinsurer
insolvencies.
- 2005 Earnings event rather than a Capital event.
• If the storms had not hit, the primary industry
would have realized a $37.7 billion profit.
• The prosperous year combined with the purchase of
private reinsurance meant the insurance industry’s
surplus was not altered significantly.
6
Insurance Industry Still Vibrant
Despite Record Events Cont’d
-
Reinsurance Market Outlook for 2006
• Since Fall 2005 new or existing companies have raised
approximately $21 billion of new reinsurance capacity
arriving too late to influence 2006 January renewals.
• January renewals didn’t see major reinsurance capacity
crunch that was evident after Hurricane Andrew and
September 11, 2001.
• 2006 Spring renewals will likely show reduced capacity in
Florida and likely increased prices.
• Last 2 years demonstrate the resilience and importance of
the vibrant reinsurance market to U.S. economy.
7
Federal Reinsurance Program for
State Cat Funds is not the Solution
- RAA believes natural catastrophes are an insurable
risk. Any federal or state program should exhaust
private sector reinsurance instead of compete with
marketplace.
- Federal and state government’s role should not be
as a private reinsurer. Instead, their role should be
limited to mitigation, development of land use
policies, providing coverage options (e.g.,
deductible alternatives), and protecting consumers
by allowing insurers to charge an appropriate rate
for the risk they take as to promote capacity and
protect against insolvencies.
8
RAA Position on Catastrophe Funds
-
Cat funds most likely will become insolvent after either a
series of events or the mega-catastrophe that is well
within the range of probability as predicted by scientific
experts. Look at Florida.
-
Government mandated pools would need to have
statewide taxpayer assessments to finance the
potentially huge catastrophe related debt. Inland
taxpayers essentially will have to pay the cost of
insurance for coastal homeowners.
-
Government catastrophe funds shift the financial risk of
catastrophic losses from private sector insurers to
insurance buyers and taxpayers.
-
States have rejected state cat funds.
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RAA Position on Catastrophe Funds
Cont’d
- Government state cat funds encourage development in
high risk areas.
- Government intervention in the form of catastrophe
funds will serve to drive the private market out of
certain states.
- The RAA opposes creating a government mandated
catastrophe fund but will continue to work with
insurance departments and legislatures to create
private market solutions.
10
Specific Concerns with H.R. 4366
- Trigger levels for federal involvement are too low –
competes with private market.
- Federal reinsurance will be under priced.
- Strips previous “private sector right to compete”
language and “regional contract” language.
- Only addresses homeowner’s insurance availability.
Disasters impact commercial and infrastructure.
- Discourages diversified insurance market.
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Political Prospects
-
No appetite on Capitol Hill or the Administration to create
federal reinsurance program.
-
Very limited insurance industry support.
-
Assuming there were ever any support, political process
would result in a “be careful what you wish for” – Look at
TRIA.
• Mandatory offer of coverage
• No rate relief at the state level
• All risk policy including flood
• Significant individual company retention
-
Congressional hearings on general issue of natural disaster
financing and insurance industry likely this year.
12
Questions
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