By Sarah Hills
BERMUDA, July 16 (Reuters) - A high level Insurance-Linked Securitization should be considered by U.S. Congress and the White House for the National Flood Insurance Program (NFIP), which covers more than five million homes and businesses in flood-prone areas, according to Wharton Business School.
A catastrophe bond, which will transfer the risks associated with extreme flooding events to capital markets investors, could help to hedge the $1.2 trillion of assets held by the NFIP - which has been deep in debt ever since the costly hurricane seasons of 2004 and 2005, Dr Erwann Michel-Kerjan, managing director, Risk Management and Decision Process Center at Wharton Business School, told delegates at the Insurance Linked Securities (ILS) summit in Bermuda.
Repeated rescue efforts have failed. Reform legislation stalled in Congress last year in a fight over adding wind-damage coverage to the program.
The NFIP is administered by the Federal Emergency Management Agency (FEMA) and provides flood coverage through more than 90 companies that sell policies and collect premiums on the government's behalf for a fee. The premiums go to FEMA.
Issuing a cat bond could help to avoid inevitable premium rises as the NFIP looks to fully capitalize against a significant future event as the number of policies and cover continues to grow, said Michel-Kerjan.
'The NFIP could issue a cat bond at a maturity of 3-5 years at a trigger amount of $15 billion; the program would not need to radically increase the premium in order to hedge the risk and send it to the reinsurance market,' he said.
Michel-Kerjan said the ILS community should be looking to convince new types of investors and issuers outside the traditional reinsurers into the space - suggesting that countries around the world should consider either investing in or issuing cat bonds.
Mexico, together with the World Bank last year issued a three-year cat bond to protect the country against earthquakes and hurricanes formed in the Pacific and Atlantic oceans.
Michel-Kerjan predicted the U.S. would issue a ILS product to cover the NFIP's liabilities in the next few years, while Morocco is currently looking to transfer the risk of a major earthquake to either the capital markets in the form of a cat bond, or by developing a new ILS instrument with other Arab countries as investors, such as The Emirates, Qatar, or Saudi Arabia.
'So far the ILS market has positioned itself mostly as an alternative to traditional reinsurance, not yet as a solid component in that new (private, public) equilibrium,' he said.
'The ILS sector needs to be bold and try new things.'
(Click here to join the Thomson Reuters Insurance Linked Securities Community for more news and analysis: https://inside.thomsonreuters.com/trading/ils)
(Editing by Toby Chopra) Keywords: ILS BERMUDA/SOVEREIGN (sarah.hills@thomsonreuters.com, +44 207 542 9619) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
BERMUDA, July 16 (Reuters) - A high level Insurance-Linked Securitization should be considered by U.S. Congress and the White House for the National Flood Insurance Program (NFIP), which covers more than five million homes and businesses in flood-prone areas, according to Wharton Business School.
A catastrophe bond, which will transfer the risks associated with extreme flooding events to capital markets investors, could help to hedge the $1.2 trillion of assets held by the NFIP - which has been deep in debt ever since the costly hurricane seasons of 2004 and 2005, Dr Erwann Michel-Kerjan, managing director, Risk Management and Decision Process Center at Wharton Business School, told delegates at the Insurance Linked Securities (ILS) summit in Bermuda.
Repeated rescue efforts have failed. Reform legislation stalled in Congress last year in a fight over adding wind-damage coverage to the program.
The NFIP is administered by the Federal Emergency Management Agency (FEMA) and provides flood coverage through more than 90 companies that sell policies and collect premiums on the government's behalf for a fee. The premiums go to FEMA.
Issuing a cat bond could help to avoid inevitable premium rises as the NFIP looks to fully capitalize against a significant future event as the number of policies and cover continues to grow, said Michel-Kerjan.
'The NFIP could issue a cat bond at a maturity of 3-5 years at a trigger amount of $15 billion; the program would not need to radically increase the premium in order to hedge the risk and send it to the reinsurance market,' he said.
Michel-Kerjan said the ILS community should be looking to convince new types of investors and issuers outside the traditional reinsurers into the space - suggesting that countries around the world should consider either investing in or issuing cat bonds.
Mexico, together with the World Bank last year issued a three-year cat bond to protect the country against earthquakes and hurricanes formed in the Pacific and Atlantic oceans.
Michel-Kerjan predicted the U.S. would issue a ILS product to cover the NFIP's liabilities in the next few years, while Morocco is currently looking to transfer the risk of a major earthquake to either the capital markets in the form of a cat bond, or by developing a new ILS instrument with other Arab countries as investors, such as The Emirates, Qatar, or Saudi Arabia.
'So far the ILS market has positioned itself mostly as an alternative to traditional reinsurance, not yet as a solid component in that new (private, public) equilibrium,' he said.
'The ILS sector needs to be bold and try new things.'
(Click here to join the Thomson Reuters Insurance Linked Securities Community for more news and analysis: https://inside.thomsonreuters.com/trading/ils)
(Editing by Toby Chopra) Keywords: ILS BERMUDA/SOVEREIGN (sarah.hills@thomsonreuters.com, +44 207 542 9619) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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