Bermuda Insurers, Reinsurers Oppose State Cat Fund Bill – HR 2555

The Association of Bermuda Insurers and Reinsurers (ABIR) has filed an opposition to HR 2555 which, the Association warns would “replace private sector risk bearing capital with government reinsurance and government guarantees of state debt.”

In a letter addressed to Representative Hon. Barney Frank (D-Mass), Chairman of the House Committee on Financial Services and Hon. Spencer Bachus (R-Ala), the ranking minority member of the Committee, ABIR President and Executive Director, Bradley L. Kading, spelled out why the organization opposes the Bill.

“The effect of HR 2555 would be to force US taxpayers countrywide to subsidize the insurance costs of state catastrophe funds in those states most exposed to hurricanes and earthquakes,” Kading wrote. He also noted that 17 of the 23 ABIR members “have US subsidiary insurance companies which employ nearly 16,000 people in the United States,” and that coverage, including cat risks written in the U.S., is reinsured in Bermuda.

Kading stressed the reliability of the private sector to handle this type of coverage, as evidenced by the payouts made over the years following natural catastrophes, and the fact that “the reinsurance industry has stepped forward and raised capital to provide the increased supply of private sector reinsurance needed by our US customers. US capital providers have expressed their confidence by providing capital to reinsurance companies and by directly assuming catastrophic risk through securitization instruments,” a sector which is expected to continue growing.

In the current soft market, Kading pointed out that companies are “returning an estimated $7.2 billion in capital to their shareholders via stock buybacks. This illustrates, for many of those companies, capital that could be used to support US catastrophe risk — in the event market demand called for it.”

He listed the major events that have been covered by Bermuda insurers and reinsurers, including Hurricanes Katrina, Rita and Wilma in 2005 and Ike in 2008. He also noted the reinsurance cover provided for the California Earthquake Authority (an equivalent of $1 billion in reinsurance) as well as “40 percent of the (broker placed) European windstorm and flood insurance coverage.”

According to the ABIR, “those that support HR 2555 are primarily focused on the incorrectly perceived high cost of insurance in local markets and argue that enactment of HR 2555 will lead to lower prices for insurance supplied by state catastrophe funds.”

However, citing the National Flood Insurance Program (NFIP) as an example, the ABIR believes that “it is not sound public policy for the US Congress to subsidize catastrophic insurance rates. The likely consequence of such action is to increase coastal development (the NFIP is now $20 billion in debt) and put more people and property in harm’s way thus increasing exponentially the future risk and debt facing the federal government. Subsidized federal reinsurance will inevitably replace private sector risk capital with government debt. It will inevitably lead to outsized catastrophic risk in California and Florida being subsidized by taxpayers from Denver to Des Moines to Bangor.”

It is the ABIR’s position that the “true way to address insurance costs is to bring down the cost of hurricane and earthquake claims. The scientific way to do this is to focus on “storm proofing” and earthquake hazard mitigation efforts,” as many insurers have also stressed. The ABIR said it “supports pending hazard mitigation legislation including HR 3026 and HR 3377.”

Kading concluded: “HR 2555 will replace much of this private sector risk bearing capacity with debt guarantees and federal reinsurance to prop up state government funds; it will replace – not augment – private reinsurance and securitizations. There are other ways in which unwise US public policy proposals can diminish private sector risk bearing.

“Another example is HR 3424 that would impose a punitive tax on affiliated reinsurance transactions between US insurance companies and their foreign parents or affiliates. Research by the Brattle Group and Wharton Professor Dr. David Cummins has shown that HR 3424, if enacted, will lead to a 20 percent reduction in US reinsurance supply. ABIR and the Coalition for Competitive Insurance Rates oppose HR 34247.”

Source: Association of Bermuda Insurers and Reinsurers (ABIR) – www.abir.bm