The U.S. Federal Emergency Management Agency (FEMA) has explained the structure of its $1.153 billion National Flood Insurance Program’s (NFIP) traditional reinsurance renewal for 2021.
As we were first to report yesterday, FEMA renewed the NFIP’s traditional reinsurance program at the January 2021 renewals, opting for a downsized $1.153 billion of coverage, but securing it from an expanded panel of reinsurers.
FEMA secured its new $1.153 billion of flood reinsurance from 32 counterparties, up from the 27 reinsurers it transacted with for 2020.
In terms of cost, FEMA paid more for its coverage, paying a premium of $195.8 million for the $1.153 billion of flood reinsurance protection for 2021, which is an increase compared to the $205 million of premium paid for $1.33 billion of coverage secured a year earlier.
FEMA has now provided more details on the structure of its 2021 reinsurance renewal.
The 2021 NFIP traditional reinsurance program will cover 9.43% of the NFIP’s flood insurance losses between $4 billion and $6 billion, 28.084% of losses between $6 billion and $8 billion, and 20.168% of losses between $8 billion and $10 billion.
This compares to 2020’s reinsurance cover that gave it 10.25% of cover for losses from $4 billion and $6 billion, 34.68% for losses between $6 billion and $8 billion, and 21.8% for losses between $8 billion and $10 billion.
So it looks like, as well as paying a little more premium per dollar of coverage, FEMA also has less low-down coverage with this renewal, while the reinsurance coverage of the highest layer of the flood reinsurance program is relatively flat with the prior year.
FEMA continues to find risk transfer a valuable way to protect US taxpayers against the financial impacts of major flood events, particularly from named storms and hurricanes.
Should a major named storm related flood loss occur that costs the NFIP $10 billion or more in claims, FEMA would recover on its full reinsurance tower and catastrophe bond program.
“We value the role of private insurance companies and investors in assuming a portion of the NFIP’s flood-risk exposure from catastrophic flood events, which improves long-term financial outcomes for FEMA, the U.S. Treasury and federal taxpayers,” explained David Maurstad, FEMA’s senior executive of the National Flood Insurance Program.
“The NFIP Reinsurance Program helps the NFIP to better prepare financially for potential losses from significant flooding events similar in size to hurricanes Harvey (2017), Sandy (2012) and Katrina (2005), bolsters our claims paying capacity and reduces the reliance on the need to borrow from the U.S, Treasury.”
Added to FEMA’s three in-force catastrophe bonds, the NFIP now enters 2021 with $2.35 billion of reinsurance secured and risk transferred to the private reinsurance and capital markets.
As we explained yesterday, we understand that FEMA is planning for another return to the catastrophe bond market in 2021 if pricing and terms are conducive.
The largest $500 million FloodSmart Re 2018 cat bond sponsored by FEMA is due to mature at the end of July 2021 and with that $500 million of cat bond coverage set to mature and its overall flood reinsurance program now smaller after this renewal, there’s a chance FEMA will look to upsize on the cat bond component of its coverage in 2021.