Frank Nutter, Reinsurance Association of America (RAA) President, has held his role at RAA since 1991. He currently serves on the Board of the International Hurricane Research Center; the Advisory Board of the Center for Health and the Global Environment, and adjunct to the Harvard University Medical School; the Council of the American Meteorological Society; and the Board of the University Center for Atmospheric Research sponsored by the National Science Foundation. He currently serves on the Advisory Board of the OECD’s International Network for the Financial Management of Large Scale Disasters and has served on the Board of the Bermuda Institute for Ocean Sciences.
Global Adaptation Institute (GAIN): Tell us about the Reinsurance Association of America (RAA).
Frank Nutter, Reinsurance Association of America President: The Reinsurance Association of America represents reinsurance companies that conduct business in the United States. Reinsurance companies insure insurance companies. They don’t deal with consumers at all, but they really become part of the capital financing mechanism for the industry. And, one major segment of what the industry does is provide financial support for insurance companies for natural catastrophe – earthquakes, hurricanes, tornados, large events that have multi-billion dollar consequences for consumers.
It is fairly common that 50 to 60 percent of those losses by insurance companies have probably been insured by reinsurance companies. So, if you take Hurricane Katrina for example, something like 60 percent of the losses that the insurance industry paid were ultimately born by reinsurance companies.
These reinsurance companies are insuring insurance companies all over the world, so if you think about wildfires in Australia or earthquakes in Chile, or the tsunami in Japan last year those were all major reinsurance events because it is a very big part of what the reinsurance sector does for the insurance sector.
GAIN: How long has reinsurance been in existence?
Nutter: You will be surprised, since the 1300s, which seems like a long time for something as little understood or known as that, but the first documented reinsurance contracts were back in the 1300s. It largely related to marine insurance, so think shipping cost. So as shipping became part of a global commerce, they would buy insurance and the insurance companies would seek to lay off some of the risk to other companies, so that was reinsurance if you will.
As a practical matter, the companies that do business in this reinsurance area, the longstanding ones would include Lloyd’s of London, which is a little more than 300-years-old and some of the other Europeans would be 150- to 175-years-old, so a long time. A lot of the reinsurance capital that supports insurance companies is fairly new capital that operates here in the U.S. or in non-U.S. countries, but serves insurance companies in the U.S. By head-count, most of the reinsurance companies haven’t existed for more than 10 or 12 years, but by capital base the large ones have been around for decades, beyond decades.
GAIN: How do natural events impact the insurance industry?
Nutter: Let me define that in two ways. Obviously, catastrophic events for consumers are important whether it is a major auto wreck or a fire at your home or something of that nature. It was probably not until the 60s or 70s that the industry began to see the large events that has multiple impacts, so think earthquakes or hurricanes - it is not as if there weren’t hurricanes around though. There was so little development in high-risk areas prior to that time that consequences, the financial consequences for insurance companies, were not as great.
So, if you think of the natural environment to include extreme events – extreme weather events in particular – the most notable growth and development in this area has largely occurred in the past 30 years. That includes recognition that for probably 25 or 30 years, in the 60s and 70s, you really didn’t have major catastrophic events in the U.S.
In the late 80s or early 90s when hurricanes, Hurricane Andrew in Florida and Hurricane Hugo in South Carolina, there was an earthquake in California. Those became major events that transformed the value of insurance and reinsurance for catastrophic events.
Having said that about the natural environment and its consequences for consumers and insurance companies, I still think that there is still really more of an emerging understanding of the value of the natural environment in being a part of protections for people and property. That really is still more of an emerging recognition for insurance companies.
GAIN: How can GAIN add value to the insurance industry?
Nutter: The GAIN Index itself would fall into that category. The insurance industry is very analytical and very quantitative. There is lots of historical data. It tries to look at hard science and it is a mathematical and actuarial industry.
So, anything that can add value particularly in a quantitative sense or an evaluative sense to the industry’s risk assessment would be of value. The GAIN Index would seem to be a particularly valued tool for the insurance industry as part of its risk assessment process and assess what its exposure is to all of that.
GAIN: How do you see the industry threading resilience into its business plans?
Nutter: There are some real thought leaders in this area from the reinsurance sector and I have mentioned Swiss Re and Munich Re in particular who not only see the value of adaptation measures, but recognize it as a long-term business strategy.
In the area of natural catastrophes, it was not until the 90s that the industry began to realize that you really probably could and should overlay the scientific thought and development of risk assessment on top of this historical database and try to have more of a prospective look at what could happen as opposed to what has happened.
GAIN: Human habitat was added to the GAIN Index this year. How does the industry insure high-risk development areas?
Nutter: In the insurance industry’s perspective, the challenge of that is that those properties should be paying a higher risk-based premium for where they have chosen to put the property or where they have chosen to live and there is a natural tension between insurance regulators and consumers on what the prices ought to be for those kinds of decisions.