Regulation by Government-Sponsored Reinsurance in Catastrophe Management

Abstract

Reinsurance offers coverage for primary insurers and is available to back them up. Insurers have an increasing demand for more financial capacity when underwriting catastrophic risks. With respect to catastrophic risks, reinsurance’s role takes several forms. Reinsurance can take a significant portion of the insured losses from primary insurers, diversify catastrophe risks globally, supply underwriting assistance, and regulate insurers’ behavior to promote risk mitigation. These roles often go beyond risk transfer and risk financing and expand to risk regulation to primary insurers. The former role has been discussed at length in the law and economics literature, but regulation by reinsurance has not been widely discussed and has even qualified as problematic.

Government-sponsored reinsurance, which marries the merits of both the government and private reinsurance, has gained increasing attention in the law and economics literature, and these programs have increased substantially in practice. Many countries use government-sponsored reinsurance to address catastrophe risks, including France (Caisse Centrale de Réassurance), Australia (Australian Reinsurance Pool Corporation), Japan (Japan Earthquake Reinsurance Co., Ltd.).

This paper will mainly argue why government should adopt government-sponsored reinsurance and how to expand regulation by reinsurance to achieve optimal catastrophe risk management in China. The chapter begins by introducing basic principles of reinsurance. Next, the main regulatory techniques of reinsurance which offer primary insurers incentives to underwrite appropriately and mitigate risk are explored. Then, the reasons why the private reinsurance market cannot provide adequate coverage for catastrophe risks and the arguments for government-sponsored reinsurance are discussed. Next, several typical government-sponsored reinsurance programs are examined and compared, including programs in France (Caisse Centrale de Réassurance; CCR), Japan (Japanese Earthquake Reinsurance Scheme; JERS), and Turkey (Turkish Catastrophe Insurance Pool; TCIP), in which primary insurers are regulated by reinsurance. Finally, it is argued that China should adopt government-sponsored reinsurance to address catastrophe risks, and the possibility and feasibility of regulation by government-sponsored reinsurance in China is addressed.

Keywords: Reinsurance, Catastrophe Management, Government Sponsor