FEMA renews NFIP reinsurance program at $1.32bn for 2019

The U.S. Federal Emergency Management Agency (FEMA) has renewed its traditional flood reinsurance program to cover the National Flood Insurance Program (NFIP) for 2019 at the slightly smaller size of $1.32 billion.

FEMA said that its 2019 NFIP flood reinsurance renewal saw 28 private reinsurers participating in the transfer of risk from the government backed flood insurance scheme to the private market.

In the event of severe flood events in the United States, the reinsurance companies backing the renewal will cover a percentage of the NFIP’s losses, which helps to remove the risk from the shoulders of the government and taxpayers’ and lowers the chances of  FEMA needing to borrow from the U.S. Treasury to pay flood insurance claims.

FEMA has been buying risk transfer from the private market for a couple of years now and returned to the reinsurance market at the start of 2018 for an enlarged and restructured $1.46 billion reinsurance placement, secured from a panel of 28 private market reinsurers.

It then added to this with the first pure U.S. flood risk catastrophe bond, the $500 million FloodSmart Re Ltd. (Series 2018-1).

The slight downsizing in the traditional reinsurance placement at the January renewal this year is likely due to the added $500 million of capital markets backed reinsurance that FEMA now benefits from.

The new 2019 reinsurance agreement came into effect from January 1st 2019 and covers FEMA for flood insurance losses to January 1st 2020.

Combined with the $500 million of capital markets reinsurance secured through the FloodSmart Re cat bond, FEMA has now transferred $1.82 billion of NFIP flood risk to private markets for the 2019 hurricane season.

“It takes an entire community to prepare for disasters, and that includes participation from the private sector. Through reinsurance, FEMA partners with private markets to build a pillar that supports a sound financial framework for the NFIP by a meaningful transfer of flood risk,” commented David Maurstad, chief executive of the National Flood Insurance Program.

FEMA said that if a named storm event occurs and NFIP claims exceed $5 billion both of the traditional and capital markets reinsurance contracts would be triggered and payments would be received under both reinsurance agreements.

The 2019 traditional flood reinsurance agreement will cover losses from a single flood event above $4 billion for the NFIP. FEMA said that it paid a reinsurance premium of $186 million for the coverage for 2019.

FEMA paid $235 million for the $1.46 billion of flood reinsurance it secured for 2018.

14% of losses are covered between $4 billion and $6 billion, 25.6% between $6 billion and $8 billion, and 26.6% between $8 billion and $10 billion for FEMA.

Guy Carpenter brokered the reinsurance renewal for FEMA and Aon provided advisory services.

It will be interesting to see whether the Agency looks to issue further cat bonds later this year to further increase the level of reinsurance protection it receives.

It’s also worth noting that legislative efforts to mandate greater use of risk transfer and reinsurance for the NFIP continue, which could stimulate further capacity increases to support the NFIP’s claims paying ability.

The 28 private reinsurance markets that backed the 2019 NFIP flood reinsurance renewal were:

• Allied World Insurance Company
• Antares (Lloyd’s Synd. No. 1274 AUL)
• Apollo (Lloyd’s Synd. No. 1969 APL)
• Ariel Re (Lloyd’s Synd. No. 1910 ARE)
• Ascot (Lloyd’s Synd. No. 1414 ASC)
• AXIS Reinsurance Co
• Brit (Lloyd’s Synd. No. 2987 BRT)
• Canopius (Lloyd’s Synd. No. 4444 CNP)
• Chaucer (Lloyd’s Synd. No. 1084 CSL)
• Faraday (Lloyd’s Synd. No. 0435 FDY)
• Hannover Ruck SE
• Hiscox (Lloyd’s Synd. No. 0033 HIS)
• Liberty Mutual Insurance Company
• Liberty Specialty Services Ltd. Paris o/b/o (Lloyds Synd. No. 4472 LIB)
• Markel Global Reinsurance Co
• MS Amlin (Lloyd’s Synd. No. 2001 AML)
• Munich Reinsurance America, Inc.
• Navigators US
• Renaissance (Lloyd’s Synd. No. 1458 RNR)
• Renaissance Reinsurance U.S. Inc.
• SCOR Reinsurance Company
• Swiss Reinsurance America Corporation
• The Cincinnati Insurance Co
• Transatlantic Re o/b/o General Reinsurance Corporation
• Transatlantic Reinsurance Company
• Validus Americas o/b/o Validus Reinsurance (Switzerland) Ltd.
• XL Catlin (Lloyd’s Synd. No. 2003 XLC), and
• XL Reinsurance America, Inc.

It’s difficult to know whether any third-party capital vehicles backed this renewal, but it’s possible some of the capacity will have been provided by ILS investors through certain of these participants.