Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

NFIP reinsurance hits high with new $575m flood catastrophe bond


The U.S. Federal Emergency Management Agency (FEMA) continued to spread its risk with its latest visit to the catastrophe bond market, as the $575 million FloodSmart Re Ltd. (Series 2021-1)  cat bond has lifted its reinsurance program for the National Flood Insurance Program (NFIP) to a new high.

national-flood-insurance-program-nfip-logoFEMA returned to the catastrophe bond market in late January seeking at least a $350 million source of additional flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).

The issuance eventually upsized to $575 million thanks to investor appetite for the fourth catastrophe bond to cover some of the NFIP’s reinsurance needs.

With the addition of this new catastrophe bond, the NFIP’s flood reinsurance program has reached $2.925 billion in size, a new high in advance of the 2021 hurricane season.

However, as we explained before, one of the FloodSmart cat bonds, the $500 million FloodSmart Re Ltd. (Series 2018-1), is due to mature in advance of the peak of the season (in August), but FEMA will still go through this year’s hurricane season with more reinsurance protection against named storm related flood events than it had a year ago.

To secure its latest catastrophe bond, FEMA entered into its fourth, three-year duration reinsurance agreement with Hannover Re (Ireland) Designated Activity Company, a unit of the global reinsurance firm.

Hannover Re, in turn, transferred $575 million of the NFIP’s financial flood risk to qualified investors in the capital markets through sponsorship and issuance of the FloodSmart Re 2021-1 catastrophe bonds.

FEMA revealed that it will pay $79.44 million in premiums for the first year of reinsurance coverage provided by this new $575 million catastrophe bond.

The underlying reinsurance agreement will cover 12.5% of NFIP losses for any single flood event, where losses are between $6 billion and $7 billion, and 22.5% if the flood events losses rise to between $7 billion and $9 billion.

“FEMA continues to view reinsurance as an integral tool in helping strengthen the fiscal structure of the NFIP,” explained FEMA’s Deputy Associate Administrator for Insurance and Mitigation David Maurstad, who leads the National Flood Insurance Program activities at FEMA.

“Accessing reinsurance from the capital and traditional markets spreads risk and thereby provides a more stable means to supplement the claims-paying capacity of the NFIP in the event of a devastating flood.  Utilizing all facets of the risk-transfer market also ensures that FEMA is positioned to manage cost as efficiently as possible across different phases of the financial and insurance markets so that we continue to be good stewards of taxpayer dollars.”

It’s good to see FEMA building on its strong relationship with the catastrophe bond market, as cat bonds play an increasingly important role in its flood reinsurance arrangements for the NFIP.

The NFIP’s reinsurance program sits at a new high of around $2.925 billion, but will fall back to $2.425 billion for the majority of the 2021 US hurricane season after August.

You can read all about this FloodSmart Re Ltd. (Series 2021-1) and every other cat bond sponsored by FEMA for the NFIP in our extensive catastrophe bond Deal Directory.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.