Future state-backed nat cat pools must better harness free market solutions: Enoizi

The viability of state pooling schemes for losses resulting from large natural catastrophe events is broadly dependent on creating an environment that allows the free market to manage the risk, Guy Carpenter’s Julian Enoizi has said.

Speaking to The Insurer at the annual industry Rendez-Vous in Monte Carlo, Enoizi – who serves as European CEO at the Marsh McLennan-owned reinsurance broker – recognised the growing dialogue around state-backed reinsurance schemes.

While there has been noise around the potential creation of a state-backed reinsurance pool in the UK for cyber catastrophe risk, the majority of such public-private partnerships (PPPs) remain focused on natural hazards.

“The reason, in my opinion, that these discussions are taking place is because you need some form of state-backed scheme to create a market where, without the scheme, it wouldn’t otherwise exist,” Enoizi explained.

“Whether it’s because the market failed and is unable to manage a risk, or whether it’s because the policy objective is affordable insurance and markets are giving risk-reflective pricing which is unaffordable, whichever of those two drivers it is, the PPP provides a potential solution.”

This publication exclusively reported in February that Guy Carpenter was advising the Italian Association of Insurance Companies on the formation of a state-backed nat cat reinsurance scheme following new legislation requiring Italian-registered businesses to purchase cover for earthquake and flood.

Article 24 mandated the creation of a new reinsurance facility by year-end. While it allows certain flexibility, the law specifies that the scheme must engage with domestic Italian insurers and should provide a limited last-resort government backstop.

The following month the Portuguese Association of Insurers doubled down on calls for a state-backed reinsurance pool for catastrophic earthquake events across the country.

Portuguese insurance market regulator ASF has been tasked with producing draft legislation for the creation and regulation of a state-backed quake pool, including the specifications of the funding structure of the solution, the loss trigger and the extent of government support.

Enoizi declined to comment on specifics, stressing Guy Carpenter’s commitment to client confidentiality, but noted that The Insurer’s reporting served to highlight the “very real and very present” focus that policymakers, regulators and the private market are placing on systemic risks, most notably the impact of climate change.

“The backdrop to this is that climate change is the cause. The symptom is increased frequency and severity of weather-related perils,” Enoizi added.

“What’s happening is that you’re seeing that free market solutions sometimes can’t exist without the partnership with the government to create an environment that allows the free market to actually manage the risk.”

He added that if the industry fails to identify solutions, its relevance will be diminished. Clients’ own climate mitigation measures will ultimately temper demand. Equally, if the (re)insurance industry fails to provide solutions then clients may look for alternative means of managing the risk and cease buying cover altogether.

“In the situation that is developing, not only in natural but also man-made and health-related perils, you need to have risk management and risk financing going together. To my mind, PPPs create the environment for that to happen most effectively,” Enoizi concluded.