Reinsurance “Loophole” Remains Open, Florida Stays Private, TRIA Still Up in the Air

Reinsurance “Loophole”  Remains Open, Florida Stays Private, TRIA Still Up in the Air

The 2014 U.S. midterm elections have pushed aside a major critic of the “hedge fund reinsurance loophole” and solidified the depopulation of the Florida windstorm market.

But despite these electoral wins — and insurers and reinsurers outspending a majority of other industries during the 2014 election cycle — the key policy goal of renewing the Terrorism Risk Insurance Act (TRIA) remains unclear.

For so-called “alternative capital” reinsurers backed by some of the largest U.S. hedge funds, the defeat of the Democratic Senate majority means that the chief critic of their business model will be sidelined from power.

Sen. Ron Wyden (D-Ore.) will lose his chairmanship of the powerful Senate Finance Committee to be replaced by long-time Sen. Orrin Hatch (R-Utah), according to published reports.

Wyden hit at hedge fund reinsurers earlier this year with latter to U.S. Treasury Secretary Jack Lew decrying what he described as “a reinsurance loophole exploited by hedge funds” that was eroding the U.S. tax base. In the letter, Wyden had demanded that Treasury reveal its plans to ending the “abuse.”

Big hedge funds such as Third Point Capital, Greenlight Capital and Paulson & Co. have set up Bermuda-based reinsurers over the past several years, much to the consternation of traditional reinsurance providers.

A response from Secretary Lew in August said the Treasury and the Internal Revenue Service were “actively searching for legislative and administrative options for addressing the reinsurance loophole.”

However, with Wyden sidelined and the Obama administration facing a solid Republican Congressional majority, it’s unlikely that they issue will move ahead.

The privatization of the Florida windstorm market was a big winner election night, with incumbent Governor Rick Scott defeating Charlie Crist. Crist had criticized Scott’s move towards a privatized hurricane risk market and proposed cutting down on“expensive” foreign reinsurance by expanding The Florida Hurricane Catastrophe Fund and getting carriers to purchase reinsurance from the state.

Research analysts at Keefe Bruyette & Woods saw the Crist defeat as a positive for private market insurers and reinsurance in a Wednesday vote.

“[Crist] was Florida’s governor from 2007 through 2011, and oversaw wind mitigation credits, increased competition from Citizens (Florida’s state-run insurer of last resort) and rate decreases that adversely impacted insurer profitability,” KBW said. “As part of his current campaign, he similarly proposed initiatives to decrease homeowners insurance rates, while increasing coverage. During Rick Scott’s current term, Florida property insurers were able to increase rates, while reducing or even excluding sinkhole coverage. Therefore, we expect shares of Florida homeowners insurers to be up on Wednesday.”

Finally, the future of the backstop to cover losses from a major terrorist attack is the most ambiguous issue following the midterm election. TRIA is set to expire at the end of the year and Congress would need to move ahead for renewal in a lame-duck session in order to avoid a coverage gap.

During the summer the full Senate and the House Financial Services Committee passed a bill to renew TRIA, but those efforts were stalled when Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, focused on his own version of the bill.

Given that Hensarling’s TRIA stall was an effort to get a more restrictive version of the bill passed with a Republican Congressional majority, insurers and insurers may expect a version of the bill that gradually raises the trigger until, after five years, TRIA would only nuclear, biological, radiological, and/or chemical (NBCR) events.

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