The U.S. Federal Emergency Management Agency (FEMA) has renewed the National Flood Insurance Program’s (NFIP) traditional reinsurance program at the January renewals, opting for a downsized $1.153 billion of coverage, but from an expanded panel of reinsurers.
As we revealed back in September, FEMA was back in the reinsurance market and seeking expressions of interest to participate in a January 2021 reinsurance renewal for the National Flood Insurance Program’s coverage.
The NFIP reinsurance program is now in its fifth full-year and perhaps in response to market conditions and pricing, FEMA has opted to only renew a smaller traditional reinsurance tower.
FEMA’s National Flood Insurance Program (NFIP) began using reinsurance protection in 2016, when the Agency tested the market with a small purchase of just $1 million of flood reinsurance covering September 19th 2016 running through until March 19th 2017.
The test placement was quickly followed with a January 2017 NFIP 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 turned to insurance-linked securities (ILS) 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 the Agency sponsored its second cat bond issuance, with a $300 million FloodSmart Re Ltd. (Series 2019-1) transaction in April.
A year ago, at the January 2020 renewals, FEMA secured a similar sized traditional reinsurance program with $1.33 billion of flood reinsurance for the NFIP and then added its third catastrophe bond issuance, with the $400 million FloodSmart Re Ltd. (Series 2020-1) transaction.
Including its in-force multi-year catastrophe bond protection, that took the NFIP’s total flood reinsurance cover to $2.53 billion for the 2020 calendar year.
Now, we can report that FEMA has renewed its traditional reinsurance tower for 2021, but has opted to only secure $1.153 billion of protection from the traditional market.
The panel of NFIP reinsurers has expanded for 2021 though, with FEMA securing the $1.153 billion of flood reinsurance from 32 counterparties for this year, up from the 27 reinsurers tapped in 2020.
In terms of cost, FEMA has paid a premium of $195.8 million for the $1.153 billion 2021 traditional flood reinsurance renewal.
FEMA has definitely paid more for its flood reinsurance for the 2021 calendar year, if you compare it to the $205 million of premium paid for $1.33 billion of coverage secured a year ago.
The cost of coverage at this January 2021 reinsurance renewal might go some way to explaining why FEMA has opted to downsize the NFIP’s flood reinsurance program somewhat this year.
With reinsurance rates firmer, the NFIP flood reinsurance renewal was always going to cost more. But FEMA has, of course, got the option of returning to the capital markets for another multi-year catastrophe bond, to extend the programs coverage this year.
With this $1.153 billion traditional flood reinsurance renewal and the $1.2 billion of still in-force FloodSmart Re catastrophe bonds, FEMA’s NFIP flood reinsurance program provides a total of $2.353 billion of reinsurance protection, so $177 million down on a year ago.
We’re told FEMA is planning another return to the catastrophe bond market in 2021 though and is likely to do this in advance of the maturity of its largest $500 million FloodSmart Re 2018 cat bond that matures at the end of July.
So, with $500 million of cat bond coverage set to mature and the overall reinsurance program now smaller, FEMA could have a desire to upsize on the cat bond component of its coverage in 2021, if pricing and terms in the ILS market prove conducive.
We had been hearing FEMA would like to increase the overall size of its reinsurance program in 2021, if pricing was conducive. But this seems a little less likely now, unless the cat bond market’s pricing is particularly accommodating.
Finally and also of note, FEMA added new reinsurers to the panel of its traditional reinsurance program for 2021.
We can report that Convex, Fidelis, Odyssey Re, Beazley’s Lloyd’s syndicates 2623 and 623, Hamilton’s Lloyd’s syndicate 4000 and Lancashire’s Lloyd’s syndicate 2010 are all new to the NFIP flood reinsurance program for 2021.
For this $1.153 billion January 2021 reinsurance renewal for FEMA’s NFIP, Guy Carpenter and Aon Reinsurance Solutions both provided broker services to aid in the placement.
It’s the first time Aon has been listed as a broker, as previously it had just provided financial advice to the placement.
Guy Carpenter provided financial advisory services and modeling for FEMA’s 2021 flood reinsurance renewal.