The U.S. Federal Emergency Management Agency (FEMA) has started the procurement process for a 2018 flood reinsurance program renewal for the National Flood Insurance Program (NFIP), as it seeks to transition gradually towards a multi-year approach to use of reinsurance coverage.
FEMA began using reinsurance in 2016, when it tested the reinsurance market waters with a small purchase of just $1 million of flood reinsurance for the NFIP from September 19th 2016 through until March 19th 2017.
That was followed up with a January 2017 NFIP flood reinsurance placement of $1.024 billion of coverage, supplied by a panel of 25 reinsurers.
The next step is to transition to multi-year coverage and with the 2017 reinsurance program assumed to have paid out for losses from flooding due to hurricane Harvey, the need for a renewal is clear and it is hoped that the NFIP may upsize on the program, transferring more risk this time around, as well as make it multi-year in nature.
The 2017 program covered 26% of the NFIP’s losses on a layer between $4 billion and $8 billion as a result of a single flood event and with the NFIP’s loss from Harvey estimated at up to $10 billion, it’s assumed that this $1.024 billion program has or will be paid out in full.
FEMA has been keen to build on what it called a “cornerstone” reinsurance placement and if more of the NFIP’s risk can be offered to reinsurers it will likely be welcomed, as the market is clearly ready to take on more of the risk and reduce the burden further for U.S. taxpayers.
FEMA has begun the procurement process for this January 2018 renewal, calling on reinsurers to submit their interest in participating and a request to participate in the program by December 1st.
Despite the ambition to transition to multi-year reinsurance coverage, the procurement notice states that the 2018 renewal will provide cover that is “effective for one year” and the amount of coverage to be procured has not been disclosed at this time.
That will likely depend on appetite in the market and also cost, as FEMA could find the rate it needs to pay to renew the 2017 program layer has increased, following the losses the market has suffered.
While FEMA has approval to approach the capital markets, at this time it appears that the only way ILS funds or collateralized reinsurance market players could participate in the 2018 NFIP renewal would be on a fronted basis, as the procurement stipulates a requirement for a rating.
Either an A.M. Best A-, a Lloyd’s A- or better, an S&P BBB+ or better, or a policyholder surplus of at least $350 million is a required condition to be a reinsurer participating in the NFIP 2018 program renewal.
That doesn’t rule out the participation of capital markets players or investors, but it does make it a little more difficult.
However, with 25 reinsurers participating in 2017 and demand to participate likely to be high again at the 2018 renewal, FEMA likely won’t upsize the program so significantly that a multitude of new lines are needed, hence the opportunities may be limited for ILS or other new reinsurers to join.
That said, perhaps FEMA is missing a trick by not approaching the alternative markets in a more open fashion, as whether best terms and prices will be secured from traditional reinsurers alone is not guaranteed.
The procurement does not mention any prospects of an NFIP flood catastrophe bond, or other NFIP flood ILS issuance. However, with Guy Carpenter running the procurement as FEMA’s broker it’s certain to have been considered.
It may still be too early in FEMA’s engagement with reinsurance markets for this to happen anyway, but the regular visits to the market for renewals should help with the education of Administrator’s and law makers, raising the potential for future flood ILS or cat bond issues, we’d imagine.
It looks very much like the NFIP’s 2018 reinsurance program will end up similar to the 2017. Likely per-occurrence in nature, perhaps larger, or covering a larger layer of risk, but still one-year in duration.
Another successful visit to the reinsurance market could help FEMA to be encouraged to venture into the capital markets as well, especially once it looks for a multi-year solution to its reinsurance needs.
Join us in New York in February 2018 for our next ILS conference