A bill has been reintroduced to the United States Congress that again calls on lawmakers to codify that Federal Emergency Management Agency (FEMA), as the administrator of the U.S. National Flood Insurance Program (NFIP), sets a PML target each year and buys reinsurance and capital market risk transfer solutions accordingly.
The Taxpayer Exposure Mitigation Act is one of four bills reintroduced by Congressman Rep. Blaine Luetkemeyer of Missouri and focuses solely on mandating use of risk capital to support the NFIP’s financing needs, de-risk it and enable it to pay its claims.
Efforts to enshrine in law a requirement for the NFIP to be de-risked with the help of the private reinsurance and capital markets have been underway some years, but so far these efforts have failed to gain the necessary support, or have been sidelined as other legislative issues took precedence.
The Taxpayer Exposure Mitigation Act calls for the FEMA to purchase reinsurance or a capital market alternatives to better protect taxpayers from being on the hook for future flood losses that the National Flood Insurance Program (NFIP) suffers.
Catastrophe bonds, resilience bonds, collateralized reinsurance, other insurance-linked securities (ILS) and risk transfer tools, as ways FEMA could meet this goal.
The bill calls on FEMA to cede NFIP flood risk to reinsurance and capital markets in amounts sufficient to maintain its claims paying ability and to manage its exposure to a probable maximum loss (PML) target.
This PML target would be set each year and set a maximum level of loss, against which the NFIP’s risk would be managed.
Reinsurance and capital market risk transfer solutions such as catastrophe bonds would be one part of the NFIP’s PML calculation and a tool that could be used to bring thee PML down to the target level each year.
“Since 2005, the NFIP has borrowed tens of billions of dollars to weather a series of catastrophic floods. Strengthening FEMA’s authority to purchase reinsurance will help transfer risk away from the taxpayer to the private sector. It’s a positive step forward and should be considered as part of a comprehensive restructuring of the program to be sustainable over the long term,” Shannon McGahn, Chief Advocacy Officer, National Association of Realtors commented.
“APCIA strongly supports the Taxpayer Exposure Mitigation Act and legislation requiring the use of replacement cost value in determining premium rates for flood insurance coverage under the National Flood Insurance Act. Representative Luetkemeyer has led the way to provide taxpayer protection and allow those impacted by flooding to recover more quickly. We urge Congress to enact these two bills,” added Nat Wienecke, Senior Vice President, Federal Government Relations at American Property Casualty Insurance Association (APCIA).
“As communities and families across the country continue to face devastating floods, we thank and commend Congressman Luetkemeyer for his continued leadership, strong support and advocacy for the NFIP Reinsurance Program, and for introducing the ‘Taxpayer Exposure Mitigation Act’ to enhance it. We strongly believe in the value of the Reinsurance Program and appreciate that the bill includes important factors for FEMA to consider as part of risk transfer. FEMA’s NFIP Reinsurance Program has successfully enlisted private reinsurance and capital and strengthened the NFIP’s ability to pay policyholder claims after catastrophic floods and helps to protect taxpayers against NFIP losses following an extreme flooding event. The great benefit of the Reinsurance Program was evident when over $1 billion in reinsurance was recovered by FEMA to pay claims resulting from Hurricane Harvey in 2017,” Frank Nutter, President, Reinsurance Association of America said.
Congressman stated, “The NFIP has been mismanaged for decades, and despite bipartisan calls for comprehensive reform, worthwhile action has yet to be taken in Congress. These bills would bring meaningful, permanent change to the program and make the NFIP more financially sound, give power back to the local officials it affects, and protect American taxpayers from paying for future flood losses.”
Earlier this year, FEMA sponsored a $575 million FloodSmart Re Ltd. (Series 2021-1) cat bond, which lifted its reinsurance program for the National Flood Insurance Program (NFIP) to a new high at $2.925 billion in size.
The NFIP flood reinsurance program will fall back to $2.425 billion for the majority of the 2021 US hurricane season though, as its $500 million FloodSmart Re Ltd. (Series 2018-1) is due to mature in August.