FEMA planning mid-year NFIP reinsurance placement, exploring ILS options

The U.S. Federal Emergency Management Agency (FEMA) is planning for a potential mid-year 2018 reinsurance placement for the National Flood Insurance Program (NFIP) and is actively exploring ILS options, as it continues to commit to expanding the reinsurance program it began in 2017.

In a keynote speech this morning at the SIFMA IRLS 2018 conference in Miami, NFIP COO and FEMA Deputy Associate Administrator for Insurance and Mitigation Roy E. Wright explained that the use of insurance-linked securities (ILS), catastrophe bonds and reinsurance alternatives continues, as the organisation looks to de-risk the flood insurance program with the help of the private markets.

To achieve this goal, FEMA is now planning to add to its reinsurance program at the mid-year 2018 point. So far the organisations reinsurance placements have only been at January renewals.

FEMA placed its first major reinsurance program in January 2017 with a NFIP flood reinsurance arrangement that provided it with $1.024 billion of coverage, supplied by a panel of 25 reinsurers. That layer was fully exhausted and paid out after the devastating impacts of hurricane Harvey in Texas.

FEMA then returned to the reinsurance market at the start of this year, placing an enlarged and restructured $1.46 billion placement, secured from a panel of 28 private market reinsurers.

But the use of the capital markets remains on the horizon and Wright explained that the NFIP and FEMA are committed to an expanding use of reinsurance capital sources and risk transfer, in order to gain increased support from the private markets and to de-risk the program.

Within this commitment, ILS is being actively looked at as a one of the tools for risk transfer and the capital markets as one of the sources of protection available to it.

Wright explained, “This year we are planning for a mid-year placement,” adding that, “We are evaluating ILS and all forms of reinsurance.”

The traditional reinsurance market will also be delighted to hear that FEMA may transfer more flood insurance risk at the mid-year in 2018.

Wright noted that, “We cannot guarantee an ILS placement in 2018.”

But he explained the commitment to the expansion of the risk transfer placement and that the capital markets would play a role when the time is right,” We’re committed to exploring ILS,” he said.

Wright also explained that the FEMA administrator has made it a priority to close the insurance gap for all perils, hinting at the growing desire to not just transfer the flood risk but to also get more underwritten directly in the private insurance market, saying that the private market for flood risk needs to exponentially grow.

So we will likely see another FEMA reinsurance placement for the NFIP this mid-year renewals and possible some involvement from the capital markets, a catastrophe bond or other form of collateralized protection.

The first NFIP flood cat bond would be a huge step forwards and a very attractive offering for the ILS and cat bond investment community.