The U.S. Federal Emergency Management Agency (FEMA) is back in the reinsurance market and seeking expressions of interest to participate in a January 2021 renewal of the National Flood Insurance Program’s (NFIP) traditional reinsurance program.
Our sources suggest that for 2021 FEMA may look to increase the size of the traditional flood reinsurance program a little, while at the same time we’re also told that FEMA is likely to look to the capital markets again for a new 2021 FloodSmart Re catastrophe bond, to replace the 2018 cat bond issuance that matures next year.
FEMA’s National Flood Insurance Program (NFIP) began utilising reinsurance back in 2016, when the Agency tested the market with a small purchase of just $1 million of NFIP flood reinsurance covering September 19th 2016 running through until March 19th 2017.
It quickly followed this test placement with a January 2017 NFIP flood reinsurance renewal, covering a $1.024 billion layer of risk, and in the following year, at a January 2018 renewal, FEMA secured an enlarged and restructured $1.46 billion reinsurance placement, from a panel of 28 private market reinsurers.
FEMA then looked to the insurance-linked securities (ILS) market for the first time, placing a $500 million FloodSmart Re Ltd. (Series 2018-1) catastrophe bond for the first time, which was also the first multi-year flood reinsurance protection that the Agency had purchased.
FEMA returned again in January 2019 for a $1.32 billion traditional reinsurance renewal placement and then sponsored a second cat bond issuance with a $300 million FloodSmart Re Ltd. (Series 2019-1) transaction in April.
Earlier this year, in 2020, FEMA renewed its traditional reinsurance program with $1.33 billion of flood reinsurance to cover the NFIP and then added a third catastrophe bond issuance, with a $400 million FloodSmart Re Ltd. (Series 2020-1) transaction, taking its total flood reinsurance cover for the NFIP to $2.53 billion for the year.
FEMA is now back in the reinsurance market again, beginning the process of renewing the $1.33 billion of traditional reinsurance and we’re told that if the market has the appetite and the price is not too much higher than prior years, FEMA is expected to look to add to its traditional coverage a little.
With the FloodSmart Re 2018 catastrophe bond set to mature later this year, FEMA is also expected to return to the catastrophe bond market in 2021.
Price is going to be a consideration though, we understand, and with reinsurance rates hardening and cat bond rates also much firmer, it is going to be interesting to see what kind of mix of coverage FEMA opts for in 2021.
FEMA expects to issue firm order terms for its 2021 traditional reinsurance program renewal around November 24th, with final authorisations expected to be received in the first week of December.
Reinsurance brokers Guy Carpenter and Aon’s Reinsurance Solutions are both working on the renewal of the NFIP reinsurance program again for 2021.
The renewal program will be effective around January 1st 2021 and indemnity based and is expected to provide at least one-year of coverage.
Rated reinsurance is sought, meaning any insurance-linked securities (ILS) funds or collateralised reinsurers looking to participate in the NFIP’s traditional reinsurance renewal would need to use a rated fronting carrier, it seems.
Of course another FloodSmart Re cat bond would provide ILS investors a chance to participate and given the hardening of reinsurance rates it will be interesting to see where FEMA can secure best value and capital efficiency at this renewal.
Given the cat bond market offers multi-year coverage by default, it might be attractive to upsize on that avenue in 2021. However, if cat bond rates rise significantly further, perhaps FEMA will look to upsize the traditional reinsurance placement for a single year instead.
We feel it’s most likely FEMA will look to both markets, traditional reinsurance and ILS again, as it values the diversification of its reinsurance capital sources and is likely to seek to renew some cat bond coverage to provide continuity to the investor base in its cat bonds.
We’re told the ambition to upsize the traditional reinsurance placement has been evident at FEMA for some time. Whether market conditions may change that remains to be seen, but it’s certain the renewal for 2021 will be more costly and this could have a bearing on how much coverage FEMA seeks.