Bill calls on Congress to mandate NFIP flood reinsurance & cat bonds

The United States Congress will again hear a bill in 2019 that calls on lawmakers to codify a requirement for the Federal Emergency Management Agency (FEMA), as the administrator of the U.S. National Flood Insurance Program (NFIP), to utilise reinsurance and capital market risk transfer solutions.

Efforts to enshrine in law the requirement for the NFIP to be de-risked with the help of the private reinsurance and capital markets have been underway for a number of years now, but so far the bills have failed to gain the necessary support or have been sidelined as other legislative issues took precedence.

In 2019 Congressman Rep. Blaine Luetkemeyer of Missouri has pared down one of his previous bills to focus it solely on the use of risk capital to support the NFIP’s financing needs, de-risk and enable it to pay its claims.

The Taxpayer Exposure Mitigation Act is one of four bills introduced by Luetkemeyer this month and it calls for the NFIP to be backed by more reinsurance or capital market alternatives.

The bill calls on FEMA to purchase reinsurance or a capital market alternative to better protect taxpayers from being on the hook for future flood losses the Program suffers.

The bill explicitly mentions catastrophe bonds, resilience bonds, collateralized reinsurance, other insurance-linked securities (ILS) and risk transfer tools, as all viable ways FEMA could meet this goal.

In addition the bill would enable FEMA to focus on buying multi-year coverage as well, something first seen with its first flood catastrophe bond, the 2018 Flood Smart Re transaction.

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).

Some lawmakers, such as Luetkemeyer, would like to see the Administrator of the NFIP buying substantially more coverage, in order to remove any risk of taxpayer assessments following major flood disasters.

Getting this enshrined in law could result in a significant increase in the size of the NFIP’s flood reinsurance program, which would likely result in more risk being ceded to the capital markets and ILS investors as well.

Luetkemeyer commented, “I hope my colleagues will support these bills as we continue to work toward permanent, comprehensive reforms that ensure the program is financially sound, taxpayers are protected from footing the bill for future losses, and power is shifted from bureaucrats in Washington to states, local communities and policyholders.”

The Congressman also introduced a bill to enable commercial properties to opt-out of the mandatory NFIP cover purchase requirement, which he said would allow businesses to purchase private flood insurance more easily, which would also result in more flood risk being reinsured.