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NFIP or bust? The reinsurance layer certainly is, but once or twice?


Estimates of losses to the National Flood Insurance Program (NFIP) from hurricanes Harvey and Irma’s flooding are on the rise, leaving the NFIP’s administrators with the difficult task of refunding the Program which is technically bankrupt and all but guaranteeing that the $1.024 billion reinsurance layer will payout.

Flood insurance and risk transferHurricane Harvey saw the most extreme rainfall recorded in recent history, perhaps ever, and estimates of the loss that the NFIP will end up on the hook for have ranged from as low as $7 billion to as high as $16 billion, with most now anticipating the final tally will at least be in the upper half of that range ($11bn+).

Roy Wright, the Federal Emergency Management Agency (FEMA) administrator of the NFIP said in recent days that $11 billion was likely to be the Harvey bill, it is likely this will rise and it could get up towards the Katrina levels of NFIP loss.

Hurricane Irma then followed in quick succession and while much more of a wind and surge event the rainfall and flooding as a result was also extreme. Estimates of the NFIP loss suggest somewhere in a range from $6 billion to $12 billion, although the upper-end seems a little high for this event.

The NFIP’s reinsurance program provides coverage of $1.024 billion and can pay 26% of the NFIP’s losses between $4 billion and $8 billion and the estimates suggest that the program will payout in full with losses from hurricane Harvey alone.

The NFIP reinsurance program is a per-occurrence arrangement, meaning it covers a single loss event.

But whether the NFIP has a reinstatement arrangement on this program is unclear, the organisation did not reveal this at the time the reinsurance program was purchased. If it can reinstate the reinsurance coverage following the loss from Harvey, paying a reinstatement premium of course, could the NFIP also claim on the program for its losses from Irma as a second and separate event?

The NFIP reinsurance program payout is not generally included in the private insurance and reinsurance market loss estimates from the hurricanes, so a billion dollars can certainly be added to the Harvey estimate and perhaps to the Irma one too (if reinstatement is possible).

With the NFIP almost $25 billion in debt to the U.S. Treasury and having just $1.5 billion of cash on hand, with around $5 billion in borrowing authority left, it is technically bust and has been for some time.

The reinsurance payout will be welcomed, if the contract can be reinstated and Irma can qualify as a second event then even more so.

It should demonstrate the U.S. lawmakers that paying a premium upfront in order to secure certainty in risk transfer and payout when the worst happens is  a valuable asset.

Hopefully the NFIP comes back to the reinsurance market for a much larger replacement layer next year, perhaps even letting the capital markets and insurance-linked securities (ILS) demonstrate their worth, while at the same time the reform wheels keep turning to get flood risk into the private insurance risk markets.

The 2017 hurricane season has certainly demonstrated the importance of risk transfer for the NFIP and FEMA, while back-to-back storms shows the importance of reinstatement provisions.

Update: A spokesperson at FEMA told Artemis that the NFIP reinsurance layer does not have a reinstatement provision, as FEMA had focused its resources on first event coverage this first time it has begun to manage its exposure using reinsurance.

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