FEMA seeks orders & auths for 2020 NFIP flood reinsurance renewal

The U.S. Federal Emergency Management Agency (FEMA) is expecting to secure orders and authorisations for a January 2020 renewal of the National Flood Insurance Program’s (NFIP) traditional reinsurance program in the coming days.

FEMA was aiming for firm order terms to be in place by the end of last week, while final tenders from the reinsurance markets seeking to participate in the NFIP program renewal are targeted for the end of this week, at which point authorisations are expected to have been secured.

FEMA renewed its traditional reinsurance at the January 2019 renewals, securing $1.32 billion of cover from a panel of 28 private reinsurers.

For 2020, the Agency remains open to multi-year reinsurance protection, while sizing of the renewal is harder to gauge given FEMA has added an second catastrophe bond that provides it with $300 million of multi-year reinsurance from the capital markets in the last year.

The agency originally began 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.

It followed this with a January 2017 NFIP flood reinsurance placement covering a $1.024 billion layer of risk, supplied by a panel of 25 reinsurers and then in January 2018 FEMA purchased an enlarged and restructured $1.46 billion reinsurance placement, from a panel of 28 private market reinsurers.

FEMA then came to the catastrophe bond market for the first time, resulting in the successful placement of a $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.

This was followed by the January 2019 $1.32 billion traditional reinsurance renewal placement and then the second cat bond issuance of a $300 million FloodSmart Re Ltd. (Series 2019-1) transaction.

Which leaves FEMA with $2.12 billion of in-force flood reinsurance coverage for the NFIP currently, from the 2019 traditional reinsurance renewal and the $800 million of multi-year cat bond protection.

But with $1.32 billion of the NFIP’s reinsurance program set to expire at the end of this year, the renewal will likely see another large renewal placement into the traditional reinsurance market.

For its 2020 reinsurance renewal, FEMA has commissioned its reinsurance broker Guy Carpenter to arrange the placement for January 1st 2020.

In order to participate in the NFIP reinsurance renewal for 2020, reinsurer vendors needed to submit a request to participate by November 14th 2019, at which point firm order terms were expected to have been set.

So firm order terms are likely in place by now and with final tenders required by November 22nd 2019, the authorisations from vendors are likely to all be in place by the end of this week (if the schedule has been met).

FEMA again aims 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. It will be interesting to see whether FEMA elects to procure multi-year traditional reinsurance this time around, or sticks with the multi-year coverage being in its cat bond program.

As in previous NFIP program renewals, the reinsurance cover will be indemnity based and FEMA will pay a reinsurance premium to transfer a portion of the NFIP’s flood-risk to the participating reinsurers, so the reinsurers will become responsible for paying potential NFIP losses, as defined under the reinsurance agreement.

The target size of the 2020 NFIP reinsurance renewal placement has not yet been specified and we’re sure that FEMA and its brokers will be considering catastrophe bond market conditions as well, as it could opt to sponsor another FloodSmart cat bond later next year.

Reinsurance firms and ILS specialists aiming to participate in the 2020 reinsurance renewal for FEMA’s NFIP program will have to meet minimum requirements, including having a rating or a minimum amount of policyholder surplus.

As in previous years, this suggests any ILS market participation will be fronted or through one of the rated reinsurers owned and operated by an ILS manager.

As lawmakers in the United States continue to push for the National Flood Insurance Program (NFIP) to reduce exposure for taxpayers, by de-risking and privatising risk, it’s encouraging to see the use of reinsurance continuing, with another renewal around the corner.

FEMA said that it is, “committed to further developing and maturing the Reinsurance Program to help strengthen the financial framework,” adding that the program enables an, “expansion of the role of private markets in managing flood risk,” and that FEMA anticipates, “continuing its reinsurance program and plans to secure a new reinsurance placement in January 2020.”

We’ll update you when further information becomes available around the year-end.