HOUSING AND INSURANCE SUBCOMMITTEE REVIEWS REINSURANCE AND CREDIT RISK TRANSFERS

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

Yesterday, the House Financial Services Subcommittee on Housing and Insurance, led by Subcommittee Chairman Mike Flood (NE-01), held a hearing on the role of reinsurance and credit risk transfers (CRT) in helping distribute risk across the market.

On Protecting Taxpayers Through Private Capital:

Full Committee Chairman French Hill (AR-02)said,"So much of this is offsetting loss for the taxpayers. And at the end of the day, when the losses come due, trying to figure out who's left to make those major payments. And risk transfer tools, as we've established today, and reinsurance and Credit Risk Transfer all help answer that question on who picks up those losses by bringing private capital in before losses fall on the backs of taxpayers."

Subcommittee Chairman Flood questioned witnesses on how the U.S. views catastrophic risk, to which Mr. Anthony Vidovich, Executive Vice President and General Counsel, Everest Group,replied,"The reinsurance industry is quite vibrant. Capital is continuing to enter that market and rates for catastrophe reinsurance in a number of CAT prone areas are declining because we are seeing increased competition because of that inflow of capital. ... We're also seeing new entrants come into that market to assume that risk. So the private market is responding and is quite vibrant."

Rep. Scott Fitzgerald (WI-05)said,"Private mortgage insurance helps first-time and, I would say, working-class buyers access home ownership, and it safeguards taxpayers from credit risk... The industry has grown more resilient through consistent mortgage insurance, CRT transactions, which has been, I guess, ensuring support for new buyers and claim payments during all kinds of economic turmoil."

Rep. Troy Downing (MT-02) questioned witnesses on how the NFIP uses the insurance linked securities markets to transfer risk, to which, Mr. Anthony Vidovich, Executive Vice President and General Counsel, Everest Group,replied,"In addition to the use of traditional treaty reinsurance, the NFIP has gone into the catastrophe bond space and used catastrophe bonds as a way to protect the NFIP from extreme tail risk... As I testified earlier, reinsurance has a number of different forms. Catastrophe bonds meet the investment needs of a group that see them attractive for that extreme tail risk."

Witnesses Echoed the Work of the Committee:

Mr. Vidovichsaid,"Current U.S. bank regulatory capital rules do not clearly permit the use of insurance and reinsurance to provide capital relief, even though Basel III recognizes credit protection from prudentially regulated financial institutions, including prudentially regulated insurance companies, which include reinsurers. This puts U.S. banks at a competitive disadvantage relative to non-U.S. banks in jurisdictions that permit it. As a result, U.S. banks must hold more capital against risk and cannot access this cost-effective and proven form of private capital to better manage balance-sheet risk, increasing the cost of credit and reducing the availability of credit for households and businesses."

Mr. Walkersaid,"Private capital is available to support government risks. The market infrastructure exists. The tools have been tested across hundreds of transactions over more than a decade. The programs discussed today ... are real-life, effective examples of private markets working with government agencies and entities under government conservatorship to manage and distribute risk."

Mr. Jerry Theodorou,Director of Finance, Insurance, and Trade Policy Program, R Street Institutesaid,"Reinsurers play an important role in managing insurance risk from natural and man-made catastrophes. They provide property disaster protection by absorbing risk that might otherwise erode significant amounts of insurers' capital. Without reinsurance, insurance companies are fully exposed to financial losses in the wake of mega-catastrophe events."