FLOOD: REINSURANCE AND CREDIT RISK TRANSFER HELP DISTRIBUTE RISK ACROSS THE MARKET

The following information was released by the U.S. House of Representatives Committee on Financial Services:

Today, the House Financial Services Committee is holding a Housing and Insurance Subcommittee hearing, led by Subcommittee Chairman Mike Flood (NE-01), focused on the importance of reinsurance and credit risk transfer (CRT).

Read Subcommittee Chairman Flood's opening remarks as prepared for delivery:

"I'd like to thank our witnesses for being with us today, and I look forward to an interesting discussion focusing on reinsurance and credit risk transfer.

"While distinct in how they're used, both reinsurance and credit risk transferor CRTare used for a common purpose: to distribute risk that would otherwise be concentrated in one entity across more market participants.

"Reinsurance does this by serving as insurance for insurers. Let's use an example to help demonstrate when an insurer might need reinsurance.

"Let's say a small mutual insurer issues home insurance policies primarily in communities in Western Nebraska.

"In most instances, that business model probably works well. But what if a severe storm moves through Western Nebraska, pelting homes across the region with baseball-sized hail? That insurer could see a large portion of its insureds file claims at the same timea disaster that could even send the company into bankruptcy.

"One way for an insurer to deal with this is to get reinsurance, or insurance for the insurer, that would cover exactly the type of risk that would put them in a difficult position to pay claims.

"By purchasing reinsurance, the insurer covers themselves from a worst-case scenario, much like a homeowner uses insurance to cover themselves in the event of extreme weather that causes massive damage to their home.

"Similarly, CRT is used by Fannie Mae and Freddie Mac to distribute take some mortgage credit risk off of the Enterprises' books.

"Much like reinsurance, CRTif used properlywill help redistribute some of the risk on the GSEs books to other financial actors, lessening the burden on the Enterprises themselves.

"For those of us that are interested in lessening the taxpayers' potential liability from Fannie Mae and Freddie Mac, CRT is a tool that can help meet that goal.

"CRT is designed to put private capital ahead of the taxpayer in the case of mortgage defaults. When it operates properly, it both spreads the risk and lessens taxpayer exposure to downturns in the mortgage market.

"While this discussion will largely focus on transferring risk between insurers or the Enterprises, both reinsurance and CRT have downstream effects on the insurance market and mortgage marketincluding consumers.

"A market with concentrated risks is going to be more likely to have problems when unusual events arise.

"As a policyholder, you want your insurer to have diversified risk to ensure that when something happens to you, your insurer doesn't have any problem paying your claim.

"As a prospective homebuyer, when you are shopping for a mortgage, you want the best terms and lowest interest rate possiblesomething that is easier to find when the Enterprises are healthy and the conforming mortgage market is running smoothly.

"The bottom line: reinsurance and CRT help distribute risk across the market. Both make our insurance market and mortgage market operate safely and soundly.

"I'd like to add the following documents to the record for this hearing:

A letter from the National Association of Realtors

"I look forward to hearing from our expert panelists on these important issues, and I yield back."