Credit Risk Transfer
Reinsurance programs such as the National Flood Insurance Programs’ reinsurance program have proven to be effective at limiting taxpayer liabilities by shifting a portion of their risks to the private market. As weather-related disasters have unfortunately become increasingly common, this federally administered program has been able to buy its own insurance from private insurance companies to spread risk to minimize taxpayer liability. In 2017, for instance, the NFIP bought reinsurance from a consortium of 25 private insurers, which agreed to cover 26 percent of NFIP’s losses between $4 billion and $8 billion. Though the NFIP paid the consortium $150 million in premiums for this coverage, it ultimately saved taxpayers $1.042 billion in the aftermath of Harvey when the reinsurance coverage kicked in.
The effectiveness of the NFIP’s reinsurance program is just one example of how federal insurance, loan or loan guarantee programs can limit taxpayer liabilities – and even improve the federal balance sheet – by transferring some of their risk exposure to private insurers. Similar successes include the “credit risk transfer” activities of Fannie Mae and Freddie Mac, which enable the housing financing agencies to share the risk of defaults on the mortgages they buy, bundle and securitize. Another example is a $1 billion reinsurance program launched by the Export-Import Bank in 2018 to help cover potential losses from its aircraft financing transactions. Among the critical activities of the Ex-Im Bank to support U.S. exporters is to offer loan guarantees as financing support for foreign buyers of American products such as aircraft.
Despite the promising results from these efforts, other agencies with similar programs do not currently have or believe they have the authority to explore or experiment with private risk. This status quo limits the broader consideration and adoption of sensible risk transfer activities by other agencies.
The Council sees the value of credit risk transfer as a way to limit taxpayer liabilities. Like the success of the reinsurance placements with the NFIP and Ex-Im Bank, we would like to see more opportunities for the federal government to off-set its risk through reinsurance buys on the private market. Unfortunately, the ability for an agency to assess its risk profile and then transfer that risk is not an inherent one. Agencies need Congressional approval, and we are working with House and Senate legislators on avenues to make this a possibility.