The U.S Congress is considering enacting a new bill that would require the United States Federal Emergency Management Agency (FEMA) to purchase more insurance, reinsurance, and capital market tools for a broader range of disaster-related costs.
FEMA already uses a reinsurance program to cover some of the flood insurance risks held by the National Flood Insurance Program (NFIP), but lawmakers could require the agency to rely on risk transfer methods to cover the costs from many other types of disaster.
The bill in question, named the Disaster Assistance Risk Transfer Act of 2018, was introduced to Congress last month and is currently under consideration by the Subcommittee on Economic Development, Public Buildings and Emergency Management.
The bill proposes that: “Not later than 90 days after the date of enactment of this section, the Administrator of the Federal Emergency Management Agency shall solicit proposals and may secure contracts from private entities providing insurance, reinsurance, or capital market investments to transfer a portion of the risk of assistance provided under any or all of sections 403, 404, 406, 407, 408, and 428, and of title V.”
Additionally, any excess funds generated by the proposed risk transfer arrangements would be stored in a Disaster Relief Fund to be used by FEMA for recovery and response in the event of a disaster.
Artemis noted that the range of risk transfer products proposed by the bill could also reduce the disaster burden on taxpayers, either through traditional re/insurance market sources, or through capital market instruments such as catastrophe bonds and other insurance-linked securities (ILS).
Approving the bill would enable private risk transfer and reinsurance markets to assume much more of the uninsured catastrophe and severe weather risk in the U.S, which has traditionally been financed solely the government.
Artemis also suggested that parametric triggers will likely be a component of any catastrophe risk transfer deal that FEMA enters, as they would ensure the kind of rapid payout required for effective disaster response.
In January 2018, FEMA secured a $1.46 billion reinsurance placement with 28 private market reinsurers, and has since confirmed that it has an ILS transaction scheduled for July.