NEWS
Bank capital, cannabis, cyber: all growth opportunities for reinsurers
The RAA is focused on identifying potential areas of growth for the reinsurance industry.
Providing bank capital, insuring cannabis businesses and cyber insurance are just three of several areas the Reinsurance Association of America (RAA) is focused on, as it looks to identify potential areas of growth for the reinsurance industry.
That is the perspective of Frank Nutter, president of the RAA, the trade association for US property/casualty reinsurers, speaking ahead of the APCIA annual conference in Boston. The RAA lobbies for a regulatory environment that ensures its industry remains globally competitive and financially robust. Nutter steps down at the end of the year, to be replaced by Lee Covington.
“We are always seeking new ways to develop market opportunities for reinsurers,” he said.
“We look at government programmes and legislation and consider how we can help open up avenues for the industry that can become opportunities for revenue growth.”
The RAA has in the past been successful in bringing government and the private sector together in ways that facilitate risk transfer, opening up new markets for reinsurers while also benefiting policyholders. Successful examples of this include the way terrorism, mortgage and flood risk are transferred.
Now, Nutter says, new risks are on its radar where it believes the right government support could again open up new markets. The first is cyber risk.
He stresses that the RAA is not advocating any specific proposal, because such a thing does not exist—yet. Rather, the fundamental question of whether government involvement would help this market develop is worth evaluating, he says.
“More reinsurers are interested in writing cyber risk, but some leaders have suggested we explore whether a public-private partnership with government needs to be considered,” Nutter said.
“We want to be ahead of curve—not wait until a cyber event.”
Frank Nutter, RAA
A key development on this occurred in March when the Biden Administration invited comments on whether a public-private partnership that would cover catastrophic cyber events is worth exploring. Nutter says that the RAA firmly believes that it should be—which is at odds with the views of some other bodies.
“We have said this should be explored, although we are the only organisation that has said yes—others are more in a wait-and-see mindset,” he explained.
“We want to be ahead of curve—not wait until a cyber event. A lot of that view was driven by the experience of the COVID-19 pandemic and the realisation that there are claims that could swamp the industry globally. So we would rather get ahead of it.”
A hot topic
Another area that clearly needs government involvement—albeit in a different way—is the rapidly growing cannabis industry. The US now finds itself in the uneasy position wherein cannabis remains an illegal substance at the federal level—yet many states have authorised its recreational or medical use.
This has led to a growing industry. US-based companies are growing the drug, transporting it, distributing it, selling it—at a state level. All these businesses need insurance, creating opportunities for reinsurers in turn, yet insurers supporting these companies with insurance are deemed to have broken federal law.
The RAA is part of a group looking to secure a “safe harbour” at a federal level for insurers working with state-licensed cannabis-related businesses. Legislation has been passed by the House of Representatives several times but as yet, however, the Senate has rejected the bill.
Nutter hopes this will soon change. “We’re hopeful that the Senate will pass the bill,” he said. “That would create a market opportunity for insurers and reinsurers. Most of these cannabis businesses have all the traditional insurance exposures but, because of the illegality of cannabis at the federal level, carriers have been unwilling to write them.”
“We are looking at how banks will be able to transfer risk into the reinsurance sector.”
The third opportunity is coming as US regulators look to implement Basel III, a framework for banks’ capital and liquidity requirements, likely to be in place by 2025. This should open the door to banks being able to use reinsurance as a means of diversifying their capital bases. Such practice has been common in Europe—but not in the US. The RAA is lobbying to ensure banks will get credit for using reinsurance.
“We are looking at how banks will be able to transfer risk into the reinsurance sector—and diversify their bank capital support in the process,” Nutter said.
“It is fairly common in Europe: banks purchase reinsurance to diversify their capital base. We believe the implementation of Basel III in the US will open the door to that if it’s done in the right way.”
Other challenges
Nutter added that the RAA is looking closely at the challenges facing property insurance in a number of states, driven by the occurrence of more catastrophic events ranging from wildfires to storms to floods, litigation and unsuitable or slow regulation.
“We are looking at what measures might be appropriate to stabilise these markets, although the solutions will be unique to each state,” he said.
The RAA is still pushing for changes to the National Flood Insurance Program (NFIP) that would move more risk back into the private sector and make it more sustainable for the long term.
The NFIP is routinely extended by Congress on a short-term basis—usually for six months at a time. The RAA is pushing for fundamental reforms of the programme that would achieve two main aims: enhancing its utilisation of the reinsurance markets, making it more resilient, and encouraging the development of a private insurance flood market.
Main image: Shutterstock / Anton Watman
