FEMA begins 2019 flood reinsurance program renewal process

The U.S. Federal Emergency Management Agency (FEMA) has begun its procurement process for a 2019 flood reinsurance program renewal for its National Flood Insurance Program (NFIP), with multi-year protection being eyed.

FEMA started its reinsurance journey back in 2016, when it tested the market with a small purchase of just $1 million of flood reinsurance for the NFIP from September 19th 2016 running through until March 19th 2017.

That was followed up with a January 2017 NFIP flood reinsurance placement covering a $1.024 billion layer of risk, supplied by a panel of 25 reinsurers.

Following that, the NFIP returned to the reinsurance market in January 2018, purchasing an enlarged and restructured $1.46 billion reinsurance placement, secured with the help of a panel of 28 private market reinsurers.

Most recently FEMA came to the catastrophe bond market for the first time, resulting in the successful placement of the $500 million FloodSmart Re Ltd. (Series 2018-1) cat bond, which also represented the first multi-year flood reinsurance protection that the Agency had purchased.

The $1.46 billion 2018 reinsurance renewal only had a single year duration and FEMA officials have regularly said since then that the ongoing mission is to expand this program, utilise as much multi-year protection as they can, and to diversify funding sources using the capital markets and more catastrophe bond issues.

So January 2019 will see the renewal of the NFIP’s flood reinsurance program, with expansion of the program’s size likely and perhaps multi-year adding into the mix as well.

It will also be interesting to see whether the ILS fund market gets more involved through collateralized participation in the reinsurance layers this time around, as the program has been the domain of traditional rated carriers so far.

In order to participate in the NFIP reinsurance renewal for 2019 vendors have to submit a request to participate by November 19th 2018, with final tenders needed by November 29th 2018. Guy Carpenter remains the FEMA reinsurance broker for this placement.

FEMA said that it intends to procure reinsurance to cover flood risk in the United States that is insured by the NFIP, with the reinsurance to be effective for one or more years (hence the multi-year question).

The coverage will be indemnity based, for which FEMA will pay a reinsurance premium to transfer some of the NFIP’s flood-risk to reinsurers, which will as a result be responsible for paying potential NFIP losses as defined under the reinsurance agreement.

The size of the 2019 NFIP reinsurance placement has not been specified, but it’s assumed that it will be larger than the expiring contract.

Reinsurance firms or ILS funds looking to participate will need to meet minimum requirements, including having ratings or a minimum amount of policyholder surplus, which suggests any ILS participation would not be fully collateralized, instead being fronted or through a rated vehicle owned by an ILS manager.

It does not seem likely that FEMA will look to the catastrophe bond market again in January, so it is perhaps more likely that any further FloodSmart Re cat bonds are mid-year issuances, while the traditional reinsurance is at the beginning of the year.

Seeing FEMA continue its reinsurance purchases is no surprise, as U.S. lawmakers has stated a desire to de-risk entities such as FEMA and to encourage greater private insurance market participation in flood risk generally.