House Subcommittee Explores Use of Capital Markets to Spread Catastrophe Risk

October 11, 2002

The House Financial Services Oversight and Investigations Subcommittee is exploring the expanded use of capital markets to spread the financial risk from future catastrophic losses.

At a hearing this week, the Subcommittee used a General Accounting Office (GAO) report on catastrophic risks and the use of risk-linked securities to spread risks as the backdrop for the hearing. Witnesses, including representatives from GAO, the National Association of Insurance Commissioners, Swiss Reinsurance,
PIMCO and the Bond Market Association, commented on the current use of risk linked securities, such as catastrophe bonds, and outlined prospects for expanded use of such financial tools.

“NAII supports the development of insurance securitization in the United States to provide additional options for insurers seeking to attract capital to spread their catastrophe and other risks,” Catherine Willis, director of federal government relations for NAII, said.

Major catastrophic events are generally rare yet potentially very costly, so insurers frequently look for additional sources of capital to spread the risk. Most insurers have typically looked to the reinsurance market to provide the capital to offset such catastrophic losses.

“NAII believes that making risk-linked securities instruments more available by eliminating the regulatory and tax impediments to conducting securitization in the U.S. could enhance insurers’ ability to distribute the risk posed by such events, creating further capacity for both primary carriers and reinsurers,” NAII assistant vice president Stephen Broadie said. “NAII has supported the development and adoption in several states of NAIC model laws that facilitate
the conduct of insurance securitization in the United States.”

Witnesses discussed these and other issues associated with the relationship between large institutional investors and the catastrophe bond market.

Witnesses also discussed the need for education about the instruments and acknowledged that the decreased appetite investors have for risk in their portfolios given the current economy contributes to the limited use as well.

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