FEMA should use capital markets for NFIP reinsurance alternative: Marsh

In a report that recommends a variety of policy-led reforms for the U.S. National Flood Insurance Program (NFIP) broking group Marsh urges the Federal Emergency Management Agency (FEMA) to take advantage of the capital markets for reinsurance.

Marsh President and CEO Peter Zaffino shared the findings of the report with members of the U.S. Congress and NFIP leaders in Washington, D.C. yesterday, urging them to enact meaningful reform in order to strengthen the NFIP’s role in the flood insurance market.

“Flood disasters represent the number one natural catastrophe in the US, and the NFIP plays a critical role in helping Americans recover from these events,” commented Zaffino. “The report presents suggestions on how policymakers may capitalize on this opportunity to enact meaningful reforms and greatly improve this important program.”

High up among the recommendations is for the NFIP to make greater use of reinsurance capacity in order to reduce the burden on the U.S. government and ultimately the taxpayer.

Capital market solutions are mentioned as a potential piece of this, with the report advising that the capital markets play a role as secondary risk takers in a variety of different scenarios for how the NFIP could be reformed.

The suggested reforms vary from an as-is, but with greater use of private market risk transfer, right the way through to running off the NFIP and making flood insurance an entirely private market affair.

In all of the scenarios the report advises the use of the capital markets as a source of reinsurance and risk transfer capacity, to help bear the risk and provide the efficient capacity required to make flood insurance as viable as possible.

The report calls for the NFIP to be expanded in size to increase the amount of flood insurance in force.

Increase the participation in flood coverage by simplifying the homeowners’ documentation process, increasing oversight of the mandatory purchase of insurance in high risk zones, providing greater transparency into the compensation structure of all program participants, and improving training requirements for agents who sell NFIP coverage and advise consumers about the NFIP.

At the same time the report calls for increased use of risk transfer and reinsurance in order to provide the capital and capacity support to make this happen.

Reduce the federal government’s exposure to flood risk by increasing private insurer participation and adopting reinsurance transfer mechanisms to deliver more predictable results.

At the same time the report urges the use of more technology to make the NFIP, in whatever form, more efficient.

Upgrade technology and revise business practices in order to streamline the application, risk assessment, and claims process.

“By upgrading technology, increasing transparency, and harnessing the capital of the primary and reinsurance markets, policymakers can enable the NFIP to better serve communities and individuals for decades to come,” Zaffino commented.

With the availability of capacity in reinsurance and the insurance-linked securities (ILS) market at or near highs, and risk models for inland flood in the U.S. becoming increasingly advanced, the time to transfer some of the NFIP’s risk to the private market is now.

The report states; “FEMA should expeditiously seek reinsurance or other alternative capital schemes to reinsure a portion of the federal program exposed to flood losses.”

By entering into risk transfer FEMA can reduce the amount of risk the NFIP holds, lowering the government and taxpayers exposure, while securing capacity that can help the NFIP expand and grow the market for flood risk insurance across the U.S.

Catastrophe bonds could feature as part of any risk transfer program for the NFIP, with either indemnity or parametric triggers likely to be feasible. The capital markets and ILS investor appetite for access to new sources of risk remains high and U.S. flood would bring a new diversifying peril to the market, which is almost certain to result in high levels of demand.

With the U.S. Congress set to discuss and address the reauthorisation of the NFIP before the current legislation expires at the end of September 2017, it is to be hoped that the Congress and NFIP leaders take the opportunity to follow the example set by residual insurance markets in embracing alternative reinsurance capital.

The opportunity to offload a significant proportion of the NFIP’s risk has likely never been greater. If the NFIP wants reform the use of risk transfer and reinsurance is perhaps the best way to provide the capacity to allow it to be restructured securely and effectively.

The report is the result of a collaboration of Marsh & McLennan subsidiaries insurance broker Marsh, flood insurance technology supplier Torrent Technologies, reinsurance broker Guy Carpenter, and management consultancy Oliver Wyman.

Also read:

– NFIP extension could see more U.S. flood risk move to private reinsurance markets.

– Capital markets can help reform America’s approach to disaster risk.

– NAMIC suggests catastrophe bonds for National Flood Insurance Program.

– Flood catastrophe bonds could be the future of the NFIP.