Guide to Government Pools

GUIDE TO GOVERNMENT POOLS AXA XL is a division of AXA Group providing products and services through four business groups: AXA XL Insurance, AXA XL Reinsurance, AXA XL Art & Lifestyle and AXA XL Risk Consulting. Neither AXA XL nor any of AXA or XL employees make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information or data disclosed herein, or represents that its use would not infringe privately owned rights. The views, findings and opinions of the authors expressed herein are the views, findings and opinions of the authors and do not necessarily reflect the views of AXA XL. © 2018, AXA SA. All rights reserved. GUIDE TO GOVERNMENT POOLS Contents 4 Making the most of our strength 24 Protecting the most vulnerable Reinsurance pools seek to provide insurance where there is AXA XL’s involvement with Flood Re makes business sense, but none or where it is not readily available, but the demand for also helps close the protection gap, says Catherine Turner, head of them is not as great as it could be. To introduce this special international property treaty, London Reinsurance. report, Jonathan Gale of AXA XL writes that the industry needs to develop a broader approach to how the risk is assumed and 26 Spreading the terror protection load accounted. Pool Re, the UK’s terrorism reinsurance pool, aims to maximise involvement of the private market. CEO Julian Enoizi explains 7 What makes a pool successful? how it achieves this. There are many factors to be considered during the formation and maintenance of a reinsurance pool to ensure it achieves 29 A different market its objectives, says Jonathan Gale of AXA XL. Terrorism risk presents its own unique challenges to a pool, says Miles Brewer, assistant underwriter, international property treaty reinsurance, in AXA XL’s Bermuda office. POOLS AND UNDERWRITERS’ VIEWS 30 Resisting the opium of free reinsurance 10 Build to withstand the biggest shocks If a pool does not transfer enough risk into the private market, The California Earthquake Authority, formed in the aftermath of it can be seen as a source of free reinsurance, subsidised by the 1994 Northridge earthquake, is ready for the ultimate test, an increasingly dissatisfied government, says Will Farmer of says CEA chief financial officer Tim Richison. AXA XL Crisis Management, UK. 13 A long-term commitment BROKERS’ VIEWS AXA XL has made a long-term commitment to working with the California Earthquake Authority, says Megan Kempe, underwriter, US Property Treaty Reinsurance at AXA XL in Bermuda. 32 Government schemes:looking to the future How will governments approach risk in the future? James Vickers, chairman, Willis Re International, and Rowan Douglas, 14 A unique approach to risk CEO Capital Science & Policy Practice, Willis Towers Watson, The unique structure of the Taiwan Residential Earthquake give their views on how government schemes might—and Insurance Fund sets it apart from other schemes, says Ann should—develop. Chua, head of Asia Pacific Reinsurance at AXA XL. 34 An urgent need to close the protection gap 16 Challenges and opportunities The flood protection gap is particularly key for advanced AXA XL’s long-standing relationship with the Caribbean and emerging markets and perhaps needs to be looked at Catastrophe Risk Insurance Facility typifies its flexible, adaptive with greater urgency, says Nick Frankland, UK CEO of Aon’s approach to reinsuring pools, says Lourdes Robaina, assistant Reinsurance Solutions business. director of AXA XL’s Latin America Reinsurance business. 38 A loss leader that benefits society 18 Effective risk transfer Well-structured government pools benefit society and help Katie Shaw, property treaty reinsurance underwriter, outlines economies recover faster following significant disaster risk how the Massachusetts Property Insurance Underwriting events—but better data and more education are almost always Association approaches reinsurance through its relationship required to get them off the ground, according to Jonathan with AXA XL. Clark, managing director, Guy Carpenter, and Charles Whitmore, head of Placement Solutions Group, Guy Carpenter. 20 A powerful partnership Wade Stier, vice president and US property treaty reinsurance 40 Appendices of Government pools underwriter based in AXA XL’s Bermuda office, explains how a strong partnership with reinsurers helps to keep pools and similar schemes afloat. 22 Flood Re: ready to be tested The success of a reinsurance pool relies on alignment of the interests of all stakeholders, Adam Golding, Flood Re’s chief finance officer, and Dermot Kehoe, Flood Re’s transition director, explain. GUIDE TO GOVERNMENT POOLS - AXA XL 3 Making the most of our strength Reinsurance pools seek to provide insurance where there is none or where it is not readily available, but the demand for them is not as great as it should be. To introduce this special report, Jonathan Gale, chief executive, Bermuda Reinsurance and managing director at AXA XL, writes that the industry needs to develop a broader approach to how the risk is assumed and accounted. ollowing on from our first report “The Protection Gap” issued of 451 pools worldwide and we are happy to make an abridged version in September 2017 we wanted to provide deeper insight into available on request (email [email protected]). the role governments could play in the future and also our The catalogue of risk pools represents our best efforts to provide a thoughts on what makes government-sponsored risk transfer F close to comprehensive list but we may have inadvertently missed mechanisms (referred to in this report as “pools”) successful. some and there are others—small municipal pools, for example, in the The complexity and divergent operations of our subject matter US—which we have chosen to omit. can make it difficult to generalise with a single word such as “pool” Most of the pools referred to in this report provide cover to individual but throughout we are talking about entities sponsored or run by policyholders, either directly or through reinsurance. However, there is a government or quasi-governmental entities that seek to provide an increasing amount of coverage purchased for immediate disaster insurance where there is none or where it is not readily available. response, particularly from the World Bank, triggered by the scale of We have kept this report focused on catastrophe risk rather than a disaster (parametric coverage) where the proceeds are used to facilitate response and recovery. financial risk although governments, particularly the US government, are increasingly exporting mortgage and credit risk to the world’s (re) On the basis of “risk is risk is risk”, we think the industry needs to insurance markets. In addition, we have compiled a detailed catalogue develop a broader approach to how the risk is assumed, and accounted, 4 GUIDE TO GOVERNMENT POOLS - AXA XL “The covers we are envisioning are not indemnity-based due to the ultimate beneficiaries not having the financial wherewithal to purchase the insurance in the first place.” be it traditional (re)insurance, cat bonds or derivatives. Speculation is a If the first duty of any government is the safety and security of concern when the industry moves away from the principle of indemnity. its people, it should be straightforward to make the case and as The covers we are envisioning are not indemnity-based due to the ultimate an industry we need to think how we do that more effectively, beneficiaries not having the financial wherewithal to purchase insurance in specifically: the first place. • Demonstrate what works and show the scale and variety of pools Having a fairly calibrated and understood parametric trigger allows for worldwide—as demonstrated in this report; immediate payment of funds without claims assessment. This enables companies such as AXA XL to involve alternative capital more easily, • Develop models and accumulate, enrich and share data; increasing capacity and passing on any savings from reduced cost of • Study, publish and learn from past events, eg, CCRS case studies; capital requirements. • Understand the complexity of government, decision-making and The importance of scale and speed of response following a disaster is different terminology and vocabulary; intuitive and we are working with Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School (CCRS) to prove with • See Public-Private Practice Groups as a segment or industry vertical facts rather than intuition showing what increased insurance penetration in their own right. All the brokers we spoke to do this but with a couple means to a population. If done well, a region should actually benefit of notable exceptions, this business falls to underwriters as part of an after a disaster with improved, affordable and more resilient housing, overall portfolio; reduced indebtedness, and increased employment in construction and stability in other industries, but most important of all it should benefit from • Similar to the above: if we organise around the segment we need to the immediate improvement and holding together of communities and back it up with resource; families affected by disaster (See Case Study 1 and Case Study 2). • Engage with regulators to help them understand the role insurance can play in closing the insurance gap including addressing flood The case for pools and earthquake prone assets on the balance sheets of financial We asked all of our contributors for their thoughts on what is limiting the institutions; and growth of pools—there’s no shortage of disasters or capital looking for risk but there doesn’t seem to be the demand for pools. • Be patient. GUIDE TO GOVERNMENT POOLS - AXA XL 5 “The gap between total loss and insured loss needs to close and the only entities capable of making a meaningful difference are governments and bodies such as the World Bank.” Thinking ahead and they don’t necessarily come.

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