The U.S. Federal Emergency Management Agency (FEMA) has expanded on its test 2016 reinsurance arrangement, transferring $1.042 billion of risk from the National Flood Insurance Program (NFIP), to 25 reinsurance carriers for a 2017 reinsurance program.
Artemis discussed in September 2016 how FEMA had launched the National Flood Insurance Program 2016 Reinsurance Initiative to enable it to more effectively and actively manage its financial risks, by accessing traditional or capital markets sources of reinsurance capacity.
The initial purchase totalled $1 million and was secured from three reinsurance carriers, with FEMA revealing in December 2016 that it had subsequently begun a procurement process for its 2017 flood reinsurance program for the NFIP, the details of which have now been announced.
FEMA has now secured $1.042 billion of flood reinsurance protection for the NFIP from 25 reinsurance carriers. The reinsurance premium for the transaction totalled $150 million, commencing on January 1st 2017, and maturing January 1st 2018, explains FEMA.
FEMA’s initial reinsurance purchase of $1 million covers the NFIP from September 19th through until March 19th 2017, and was structured in two coverage layers.
Under the new agreement the group of reinsurers will cover 26% of losses on a layer between $4 billion and $8 billion as a result of a single flood event, so an occurrence cover, an event which has a 17.2% chance of taking place in 2017, says FEMA.
“This placement is a key step towards achieving the NFIP’s long-term vision of building a stronger financial framework. It places the NFIP in a better position to manage losses incurred from major events like Hurricane Sandy ($8.3 billion) in October 2012 and Hurricane Katrina ($16.3 billion) in August 2005 by transferring exposure to reinsurers,” explained FEMA.
The larger, 2017 NFIP Reinsurance Program will diversify the mechanisms FEMA utilises to manage the financial impacts of flood events, while putting in place the cornerstone for a multi-year placement in the future.
Furthermore, FEMA explains that the 2017 program will improve the claims-paying ability of the NFIP by securing efficient and effective reinsurance protection, and importantly promote greater private sector participation in U.S. flood risk management.
“One of the reasons FEMA secured reinsurance was to increase the NFIP’s flood claims-paying ability by protecting itself against a portion of its potential losses. Securing reinsurance does not reduce the size of NFIP’s current Treasury debt; rather, it is intended to reduce the accumulation of future debt,” explains FEMA.
FEMA received authority from the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) to secure reinsurance protection from the private reinsurance and capital markets, although at this moment it’s unclear how much of the $1.042 billion came from either.
At this time we are unclear if any of the 25 reinsurers utilised for the placement are collateralised, fronting entities or similar, as the information provided by FEMA regarding the structure of the placement and the reinsurers involved is limited.
The latest announcement from FEMA is promising for U.S. flood risk, and if the NFIP can become better supported with the help of private reinsurance and the capital markets, flood insurance could become more available, ultimately helping to increase penetration and bridge one of the developed world’s protection gaps.
FEMA is clearly working towards using a multi-year placement in the future, with the admission that the initial 2016 and the new, larger 2017 reinsurance placement lay the foundations for this to happen in the future.
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