NFIP’s reinsurance & cat bonds on-watch following RMS estimate

A hurricane Ida industry loss estimate update from RMS has put the National Flood Insurance Program’s (NFIP) reinsurance counterparties and catastrophe bond investors on-watch for potential losses, as the estimate suggests the traditional reinsurance component at-least is likely to attach and face losses.

Late yesterday, catastrophe risk modeller RMS updated its loss estimate for hurricane Ida, saying that it now expects the total loss, to private market insurers and the NFIP will be between $31 billion and $44 billion.

Within this update from RMS, is a full estimate for losses to the US Federal Emergency Management Agency (FEMA) run National Flood Insurance Program (NFIP), including flood insurance losses from the Gulf region right the way up to the US north eastern states from Ida’s remnants.

So, it’s the first NFIP specific industry loss estimate we’ve seen that encompasses all of the flooding related to hurricane Ida and its remnants, which is likely to all qualify as a single event under the terms of the NFIP’s reinsurance and definitely does under its FloodSmart Re catastrophe bonds.

RMS’ estimate for losses to the NFIP is between $3.8 billion and $6 billion.

This is notable as the NFIP’s traditional reinsurance program, which was renewed in January 2021 at $1.153 billion in size, attaches at $4 billion of losses to the Program.

This $1.153 billion of flood reinsurance covers the NFIP for 9.43% of its flood insurance losses between $4 billion and $6 billion, 28.084% of losses between $6 billion and $8 billion, and 20.168% of losses between $8 billion and $10 billion.

So, on the basis that the ultimate loss to the NFIP from hurricane Ida comes in below $6 billion, as RMS estimates, then this would only represent a $188.6 million loss at most to the 32 reinsurance counterparties backing the 2021 NFIP reinsurance program.

The mid-point of RMS’ estimate for the NFIP’s losses from hurricane Ida is $4.9 billion, so at this stage it seems reasonable to assume that the NFIP’s reinsurers are likely to face at least a small loss from this storm.

As a reminder, hurricane Harvey in 2017 caused the NFIP’s just over $1 billion of reinsurance to be completely exhausted.

That took at least three months to be reported, so the reinsurers on the NFIP’s 2021 flood reinsurance program may have a bit of a wait until any losses and recoveries are actually notified to them.

The loss estimate for the NFIP’s bill from hurricane Ida is likely to also put holders of its FloodSmart Re catastrophe bond program on-watch as well.

However, it’s worth noting that the lower-risk tranches of all of the outstanding FloodSmart Re catastrophe bonds attach at the top-end of RMS’ estimate of Ida losses for the NFIP, at $6 billion.

So any additional pressure on these cat bonds is likely to be purely mark-to-market at this stage, but investors and cat bond funds may expect to see them marked down a little more, we suspect.

There was a tranche that attached lower down, at $5 billion, so would have been considered more at-risk of attaching, but that has matured in recent weeks.

Should claims continue to flow to the NFIP though and the ultimate loss to the Program from Ida rise above RMS’ estimate, then it does seem that some of the FloodSmart Re cat bond backed reinsurance would come into play to support the NFIP’s claims payments.

At this stage that seems less likely than the traditional reinsurance being tapped though, given how much lower down the NFIP’s reinsurance tower that begins its coverage. But still, the cat bond holders will be watching closely as hurricane Ida’s losses develop over the coming weeks.

As we reported yesterday, FEMA has now begun the process of renewing its reinsurance program for 2022 and is also seeking another catastrophe bond in its next fiscal year, which begins from October.

The renewal process may be a little more challenging with hurricane Ida’s losses still developing and its seems likely that pricing will rise for the NFIP, whether it claims on the reinsurance program or not.

As we also explained yesterday, the latest NFIP claims figures we’d seen were that 13,500 National Flood Insurance Program claims had been received following hurricane Ida as of September 5th, and that 10,579 NFIP flood insurance claims were filed in Louisiana alone, as of a few days ago.

For comparison, 2017’s hurricane Harvey saw well over 80,000 NFIP claims filed.

Of RMS’ estimate for NFIP claims from hurricane Ida, the $3.8 billion to $6 billion total, the risk modeller said that $1.5 billion to $2 billion is expected to come from the Ohio Valley, Mid-Atlantic, and Northeast states, with the remainder presumably from the Gulf region.

It could have been much worse though, as RMS noted that while flood insurance take-up is significant in coastal areas in the Mid-Atlantic and Northeast, some of the areas that were worst affected by floods from the remnants of hurricane Ida have minimal ( less than 10%) NFIP participation.

While the NFIP’s eventual claims bill from hurricane Ida develops the traditional reinsurers that back the lower layer of the NFIP’s reinsurance tower are definitely on-watch, while the catastrophe bond investors will also be watching closely and cannot yet count themselves as definitely safe from loss, it seems.

Also read: Cat bonds to see valuation volatility after Ida’s north east flooding: ILS managers.