Bipartisan House NFIP draft calls for ILS & reinsurance support

by Artemis on May 26, 2017

A bipartisan draft proposing a raft of changes and amendments to legislation surrounding the National Flood Insurance Program (NFIP) calls on House members to enable the flood insurance pool to cede more of its risk to the capital markets, using a full-range of reinsurance risk transfer tools.

Flood insurance and risk transferTransferring risk away from the flood insurance program and into the private risk transfer markets, to reduce the potential burden on government and taxpayers, is a measure included in many of the efforts surrounding NFIP reauthorisation and reform.

This latest bundle of proposals has been collected from both Republican and Democrat sources, creating a bipartisan draft that has been submitted by Rep. Sean Duffy (R-Wis.), Chair of the House Financial Services Subcommittee, calling for a wide-ranging review and reform, as well as for the reauthorisation of the NFIP beyond its September 30th expiration date.

“We’re releasing this discussion draft so that all sides can continue to provide input into protecting the program integrity of the NFIP. So far, we have incorporated ideas from both Republicans and Democrats, Members from inland and coastal areas, and stakeholders across several industries. The ideas stemming from this open process will ensure that everyone who needs flood insurance will have access to it while ensuring that the NFIP does not fall further into debt,” Duffy explained on its release.

The draft proposals include measures to address topics including affordability and the cost to consumers, private insurance market participation in underwriting flood risks, a reform proposal for flood mapping,  mitigation measures, claims processing reforms and also stronger protection for taxpayers.

It is this last area, on taxpayer protection, where the calls for greater use of reinsurance and risk transfer markets come up, with the capital markets, insurance-linked securities (ILS) and the full gamut of risk transfer tools and capacity providers called on to assist.

The draft bundle submitted includes some of the proposed legislation from Senators Bill Cassidy, MD (R-LA) and Kristen Gillibrand (D-NY), which we covered recently here.

Some of the wording has changed a little but the gist remains the same, as the proposals call for FEMA’s administrator of the NFIP to “Annually cede a portion of the risk of the flood insurance program under this title to the private reinsurance or capital markets, or any combination thereof.”

Cessions to reinsurance and capital markets should be at rates that are deemed attractive and in amounts that enable the claims paying ability of the NFIP to be maintained, while limiting exposure to major flood loss events.

In achieving this risk transfer the proposed legislation explicitly commits FEMA to look to risk transfer alternatives, as well as traditional, including; “Reinsurance, capital markets, catastrophe bonds, collateralized reinsurance, resilience bonds, and other insurance-linked securities, and other risk transfer opportunities.”

The legislation calls for the NFIP to begin a program of ceding risk more meaningfully within 18 months of the enactment of the legislation and for cessions to continue annually from then.

With FEMA already having purchased over $1 billion of reinsurance protection for the NFIP at the January 2017 renewal, which it is likely to renew on an annual basis anyway, the real goal should be in increasing this figure, making full use of the appetite of both traditional reinsurance markets and the ILS market with its investors, to cede as much risk as possible, in order to lower the potential taxpayer risk and burden.

In making the NFIP a viable ongoing backstop for flood risk insurance much more needs to be done than risk transfer alone and the proposals cover many of the issues that regularly come up in discussion. Wide-ranging reform will make the NFIP more sustainable, smaller, better run and more cost-effective, while enhancing consumer choice for flood insurance and even making it more affordable.

Reinsurance and ILS capacity can play a vital role in achieving these goals, by transferring risk away from the taxpayer and passing it to the reinsurance and capital markets.

With cost-effective options such as catastrophe bonds available to the NFIP and legislative efforts all calling for an open mind to risk transfer, it stands to reason that the first NFIP flood cat bond cannot be many years away now.

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