The U.S. Federal Emergency Management Agency (FEMA) has hailed the successful completion of the issuance of its new $450 million FloodSmart Re Ltd. (Series 2022-1) catastrophe bond, which has expanded the capital markets participation in the National Flood Insurance Program’s (NFIP) reinsurance tower.
As we explained more than one week ago, FEMA secured an upsized $450 million of tropical cyclone linked flood reinsurance protection for the NFIP with its latest foray to the cat bond market.
FEMA said that it “continues engaging reinsurance markets to help strengthen the National Flood Insurance Program’s financial framework and promote private sector participation in flood-risk management.”
David Maurstad, who leads the NFIP for FEMA, explained that climate change is one key driver for FEMA’s expanding use of reinsurance protection for the NFIP, helping it to moderate the potential impacts to tax payers.
FEMA revealed that it will pay $61.23 million in premiums for the first year of reinsurance coverage provided by the new $450 million FloodSmart Re 2022-1 catastrophe bond.
The $450 million of coverage runs across three layers, or tranches of notes, providing reinsurance for 2.5% of losses between $6 and $7 billion, 5% of losses between $7 and $9 billion, and 32.5% of losses between $9 and $10 billion.
“The growing intensity and frequency of weather patterns brought on by climate change is essential to FEMA’s ongoing commitment to use reinsurance as an integral tool to help strengthen the financial framework of the NFIP,” David Maurstad, senior executive of FEMA’s National Flood Insurance Program explained.
“Accessing reinsurance from the capital and traditional markets spreads risk and in turn helps to stabilize and supplement the NFIP’s claims paying capacity in the event of catastrophic flooding.
“Using all facets of the risk-transfer market also makes FEMA good stewards of taxpayer dollars,” Maurstad added.
FEMA’s $300 million FloodSmart Re Ltd. (Series 2019-1) catastrophe bond matures in March this year, after which the NFIP will still benefit from this new $450 million cat bond, as well as a $400 million FloodSmart Re Ltd. (Series 2020-1) cat bond and $575 million FloodSmart Re Ltd. (Series 2021-1) issuance.
So for the 2022 hurricane season, remember these cat bonds only cover floods from named storms, FEMA’s NFIP will have $1.425 billion of reinsurance from the capital markets, channelled via FloodSmart Re cat bonds and fronting provided by global reinsurer Hannover Re.
The new cat bond compares well, in terms of premium cost, with $450 million of protection costing $61.23 million for the first year, compared to the $1.064 billion of traditional reinsurance which cost a premium of $171.9 million.