Fermat Capital Management Issues Public Comment on Treasury Department Notice

WASHINGTON, Nov. 19 -- John Seo, co-founder and managing director of Fermat Capital Management LLC, Westport, Connecticut, has issued a public comment on the Department of the Treasury notice entitled "Federal Insurance Office Request for Information on the Insurance Sector and Climate-Related Financial Risks". The comment was written on Nov. 15, 2021, and posted on Nov. 16, 2021:

* * *

We welcome the opportunity to respond to the Federal Insurance Office (FIO) Request for Information (RFI) to solicit input on future FIO work relating to the insurance sector and climate-related financial risks on behalf of Fermat Capital Management, LLC. Based in Westport, Connecticut, Fermat Capital is one of the largest and most experienced Insurance-Linked Securities (ILS) investment managers, providing investment management services for pension funds, sovereign wealth funds, family offices, private investors, and other clients around the world.

The conclusion of another year marked by natural disasters has once again served as a timely reminder of the increasing value of ILS to the U.S. and the global re/insurance marketplace. From inception in the late 1990s, the ILS market now contributes almost $100 billion--around 20%--of capacity to the global reinsurance market, with approximately $50 billion of that allocated to hurricane risks impacting homeowners in Florida alone. The ILS asset class has established a mechanism for capital market investors to provide new capital to the re/insurance sector and created an effective means for insurers and reinsurers to satisfy the increasing requirement to reduce risk on their balance sheets, while continuing to provide protection to the areas of the world with the greatest but also rapidly escalating demand for insurance--coastal and urban areas in the U.S. By providing multi-year protection against events so large that the solvency of any traditional reinsurer would be called into question, ILS support the efficient functioning of our insurance market and provide critical finance for vital economic activity.

While adequately capitalized for normal disasters, it is clear the re/insurance industry is significantly under-prepared to meet the cost of remote but potentially devastating catastrophic disasters that are possible today, let alone what can happen in the future with unmitigated climate change. Our demand for insurance comes from the intense and growing concentration of our population and property in urban and coastal areas of the nation, accelerating exposure to disasters and climate shocks. This pressure on our domestic insurance system also creates significant "protection gaps"--the gap between economic losses and insurance coverage--that are large, rapidly growing, and unserviceable by traditional insurance and reinsurance mechanisms.

With demand for risk capital outstripping supply, the constrained scale of the re/insurance industry creates a significant and compelling need for ILS to ensure the nation can finance and support continued economic growth in all geographies before and after a catastrophe. To date, ILS have increasingly helped stabilize the U.S. insurance market, narrow the insurance protection gap, and reduce insurance costs for homeowners and businesses./[1]

As society responds to risks such as climate change--and as new regulations are introduced to enforce climate-related guidelines--we believe ILS will play an even greater role in defining a more climate- and disaster-resilient future.

As most risks underpinning ILS are weather-related, the sector is at the forefront of monitoring changes in weather extremes on economies. Sponsors and investors alike are provided with a forward-looking, market-based indication of the costs of weather risks and, consequently, climate change, and therefore given an important signal of the relative benefits of investing in risk mitigation and adaptation. Another important aspect of ILS, such as catastrophe bonds, is their flexibility of application. Unlike traditional insurance, which focuses on the individual as a prospective policyholder, ILS are agnostic. ILS investors are concerned with whether an event, such as a flood or a hurricane, will occur and then the payout, if an event happens, can be distributed in any way as appropriate. This flexibility creates exciting new applications for programs such as inclusive community insurance schemes,/[2] for example, where the community is insured as a vulnerable group, rather than as vulnerable individuals. This flexibility of application speaks directly to Question 14 of the RFI on the availability and affordability of insurance products for climate-related risks for traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. It also relates to Question 15 on public-private partnerships or collaborations to address climate-related risks.

As FIO considers policy recommendations to make the insurance sector more resilient to climate change, FIO should consider actions that broaden and ease capital market access to insurance risks in the U.S.--for example by bringing the catastrophe bond market onshore. Such steps would increase available re/insurance capacity for tomorrow's catastrophe risks, narrow the U.S.-based protection gap when weather and climate disasters strike and help families and communities recover quicker economically from catastrophic events. Onshoring the catastrophe bond market would also be an opportunity for the U.S. to establish a leading role in a growing sector, poised to increase in strategic importance as governments and businesses respond to risks such as climate change, and to ensure our nation has the insurance products and tools it needs for the 21st century and beyond.

The remainder of our response below relates to Questions 2, 3, 5 and 7 outlined in the RFI. Our focus will be on managing physical climate risks that may affect the U.S. property and casualty insurance sector. A prerequisite to assessing how physical climate risks may disrupt our insurance markets--and, more specifically, might require the need for Federal government support--is to have accurate and up-to-date information on the geographic concentration of insured exposure.

Such information--which as discussed above is rapidly changing--is critical a) to understanding the current potential liabilities of insurers, reinsurers, states and the Federal government to catastrophic weather events, b) to identifying exposure concentrations that could pose a systemic threat to current risk management mechanisms and contingencies in place to deal with catastrophe events, and c) to establishing a robust baseline against which future projected changes in climate activity and exposure can be quantified and monitored on an ongoing basis to ensure risk concentrations are identified and appropriately managed as they emerge.

FIO is well-positioned to collect and collate insured exposure information on a regular basis from state insurance regulators, who in turn can request this information from insurance companies licensed to operate in their state. Information that would be an adequate starting point for assessing systemic physical climate risks should be reported by NAIC property insurance line of business and by county in each state. The data should include, at a minimum, information on the Total Insured Value (TIV) across all insurers for each line of business and county for each quarter, and Policy In-Force (PIF) count across all insurers for each line of business and county for each quarter. Where appropriate the TIV and PIF of weather catastrophe risk-exposed policies, e.g., policies that include wind coverage from hurricanes, flood coverage, or wildfire, should be included.

As an example, consider Florida. The Florida Office of Insurance Regulation (FLOIR) already collects the information outlined above quarterly on personal and commercial residential lines of business for admitted insurance carriers in the state. The data is made public through their QUASRng database./[3]

Increasingly, however, insurance companies operating in the state have been filing their FLOIR data as "Trade Secret." As of the second quarter of 2021, 35 insurance companies have done so, obfuscating the true geographical insurance exposure within the state and therefore the potential impact of a hurricane on the state's insurance system. We propose that, at the very least, even if not made available to the broader public, such Trade Secret information should be made available to FLOIR so that FLOIR can report to the FIO on an aggregated, anonymized basis.

With the data disclosure recommended above implemented across all states, FIO would be able a) to accurately assess the current gross insurance industry exposure by county across the nation, b) to identify factors and trends in exposure concentrations, and c) to model and estimate systemic insurance risk for the purpose of understanding current and future scenarios that will require Federal action and support. In summary, the data collected by FIO would facilitate accurate, consistent, and up-to-date insured exposure information not only for assessing the solvency of our insurance system against climate risks today but also to ensure our national insurance system is prepared and protected against climate change in the future.

Thank you for the opportunity to respond to FIO's RFI. We are available for additional information or any required clarifications.

Yours sincerely,

John Seo

Co-Founder and Managing Director

Fermat Capital Management, LLC

* * *

References:

[1] "The Insurance Industry Has Been Turned Upside Down by Catastrophe Bonds" by Leslie Scism and Anupreeta Das, The Wall Street Journal, August 8, 2016. Article can be accessed online here: https://www.wsj.com/articles/the-insurance-industry-has-been-turned-upside-down-bycatastrophebonds-1470598470?st=iof0knfh3pi48y6&reflink=desktopwebshare_permalink

[2] See, for example, the Civic Innovations Challenge to increase the financial resilience of lowand moderate-income households in New York City to flood risk through the use of inclusive insurance: https://riskcenter.wharton.upenn.edu/civicinnovations/

[3] The QUASRng database can be accessed online here: https://floir.com/tools-anddata/residential-market-share-reports

* * *

The notice can be viewed at: https://www.regulations.gov/document/TREAS-DO-2021-0014-0001

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com