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The future of reinsurance?

The future of reinsurance?. Lars Powell, PhD Research Fellow The Independent Institute & Whitbeck -Beyer Chair of Insurance UALR College of Business . Academics Predicting the Future. Long Term Capital Management CDS modeling. Catastrophe risk markets at a regulatory crossroads.

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The future of reinsurance?

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  1. The future of reinsurance? Lars Powell, PhD Research Fellow The Independent Institute & Whitbeck-Beyer Chair of Insurance UALR College of Business

  2. Academics Predicting the Future • Long Term Capital Management • CDS modeling

  3. Catastrophe risk markets at a regulatory crossroads Lars Powell, PhD Research Fellow The Independent Institute & Whitbeck-Beyer Chair of Insurance UALR College of Business

  4. The Nature of Reinsurance • Insurance for insurance companies? • Mechanism for further diversification of risk • Pools insured risk across perils and locations via syndication • A global market, but with substantial mass in the U.S. • A vehicle by which capital can be enticed to secure risk of cat losses

  5. Affects on Consumers • Benefits • Security from diversification and capital • Extends capacity for risk transfer • Improves price and availability • Criticisms • Complexity and uncertainty may limit participation • Subject to fluctuations in price and availability following capital and loss shocks • “Evil” profit motive

  6. Reinsurance v. Taxpayer Funding • Reinsurance • Achieves substantial diversification • Secured by voluntary, profit-motivated investment from around the globe • Allows market forces to affect behavior • Ex post taxpayer funding • Cannot effectively diversify • Funding generally results in unfair cross-subsidization • Creates dangerous incentives to increase risk taking

  7. Market Developments • Reinsurance and risk securitization • Providing capital to secure catastrophe risk • Potential for $100B insured event • Insurance industry capital ≈ $500B • Traditional market capital ≈ $37T • Average daily fluctuation ≈ $275B

  8. Market Evolution • Andrew, WTC, K-R-W, Investment losses • Access to capital has increased over time • Markets rebound more quickly with less disruption • Increased integration with traditional capital markets • Interest in reinsurance and ART

  9. Regulation at a Crossroads • Encourage states to internalize risk bearing • Impede market development - OR - • Support a free market to continue advancing catastrophe risk transfer

  10. Leadership • How can regulators and legislators be leaders in this process? • Study complex issues • Systemic risk • Market returns & profits • Tax concerns • Educate others • Encourage market solutions

  11. Thank you

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