The U.S. Federal Emergency Management Agency (FEMA) is back in the reinsurance market, beginning the process towards a January 2022 renewal of the National Flood Insurance Program’s (NFIP) traditional reinsurance program, alongside which is expected to be a new catastrophe bond as well.
For 2022, our sources tell us that multi-year reinsurance protection will be a particular focus of FEMA’s mission to procure reinsurance for the NFIP, as too will increasing the size of the reinsurance program again.
FEMA’s National Flood Insurance Program (NFIP) first entered the reinsurance market back in 2016, when the Agency tested it with a small purchase of just $1 million of NFIP flood reinsurance covering September 19th 2016 running through until March 19th 2017.
That was followed by 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 its first $500 million FloodSmart Re Ltd. (Series 2018-1) catastrophe bond, which was also the first multi-year flood reinsurance protection that the Agency had procured.
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.
Last 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.
In 2021, FEMA procured $1.153 billion of flood reinsurance from 32 counterparties at the January 2021 renewals, but again this was on a single-year basis.
FEMA also returned to the cat bond market for its fourth issuance, a $575 million FloodSmart Re Ltd. (Series 2021-1) issued in February 2021.
After that and factoring in the recent maturity of its $500 million FloodSmart Re 2018-1 cat bond, FEMA currently has just over $2.4 billion of flood reinsurance in-force, across its $1.275 billion of catastrophe bonds and the January 2021 renewal.
FEMA is seeking a transformer to help in issuing its next cat bond, with a process ongoing to select which firm will provide that role going forwards, which we understand includes the incumbent Hannover Re which has fronted all of FEMA’s NFIP cat bonds to-date.
So another FloodSmart Re catastrophe bond seems very likely, but now the focus also shifts to ensuring FEMA can renew its traditional flood reinsurance at January 2022.
This year, FEMA is seeking all expressions of interest to participate in the reinsurance renewal by November 24th, which is also the date it expects firm-order-terms to be issued.
Final tenders are required by December 4th, which is around the time FEMA expects final authorisations will be due.
As we said, multi-year traditional reinsurance is expected to be a focus for FEMA this year.
Now a number of year’s into its reinsurance journey, it would make sense for FEMA to secure at least a portion of the traditional program on a multi-year basis, more closely matching it with its capital markets coverage.
Failing that, shifting focus to issue more cat bonds might be a way to make more of the limit it procures multi-year focused.
Guy Carpenter is again acting as FEMA’s reinsurance broker for the NFIP placement.
Of course, at this time, hanging over this renewal is a shadow of uncertainty related to hurricane Ida and the eventual flood claims that FEMA’s NFIP will have to pay from that recent event.
The last figure from FEMA that we reported on was that more than 13,500 National Flood Insurance Program claims had been received following hurricane Ida. That’s based on data as of September 5th, so it’s clear the total will be a lot higher by now.
The only other figure we’ve seen was one of 10,579 NFIP flood insurance claims in Louisiana alone, as of a few days ago.
But we haven’t seen an up to date report on NFIP claims related to Ida yet, to include the north eastern states and flood claims across the storms duration.
Should the NFIP’s claims bill from hurricane Ida rise enough to trigger its reinsurance program then obviously that will have a very clear bearing on renewal negotiations, which may be why this figure isn’t being widely reported, as it often has been after other storms.
So the developing hurricane Ida loss situation is a factor that could complicate FEMA’s flood reinsurance renewal a little this year, especially if claims take time to be filed and quantified.
Either way though, the reinsurance market remains extremely well capitalised and capacity is almost certain to be available for the NFIP flood reinsurance program renewal for 2022 and beyond, with the only question being price and whether FEMA’s budget supports it.
The capital markets will also have plenty of capacity available and a FloodSmart Re catastrophe bond is likely to be welcomed by cat bond funds and investors over the coming months.
We’ll update you as and when news of FEMA’s renewal becomes available, or any new cat bond hits the market.