The U.S. Federal Emergency Management Agency (FEMA) is to use the capital markets for the first time for reinsurance protection, with the launch of a $275 million FloodSmart Re Ltd. (Series 2018-1) catastrophe bond to transfer risk from the National Flood Insurance Program (NFIP).
Domiciled in Bermuda as a special purpose insurance vehicle, FloodSmart Re Ltd. will target the issuance of two tranches of notes that will be sold to insurance-linked securities (ILS) funds and investors to collateralise underlying reinsurance arrangements to benefit FEMA, and to cover a portion of the NFIP’s U.S. flood exposure.
According to Artemis, the first to cover the transaction, the launch of FloodSmart Re Ltd. makes it the first catastrophe bond issued to solely provide reinsurance coverage for flood risks, as shown by the Artemis Deal Directory.
However, it’s important to note that the resulting reinsurance will only protect FEMA and the NFIP’s flood exposure as a result of U.S. named storms, meaning that it isn’t a broad flood coverage.
FEMA announced previously that it would look to enter the capital markets in order to bulk and diversify its expanding reinsurance programme arrangements, and the result is FloodSmart Re Ltd.
According to Artemis, FEMA is seeking at least $275 million of reinsurance protection from the capital markets and third-party investors, through the issuance of two tranches of notes by FloodSmart Re Ltd.
Global reinsurer Hannover Re is acting as the ceding reinsurance firm for the transaction, fronting the coverage for the NFIP. This means that FEMA and the NFIP will be reinsured by Hannover Re, which will in turn enter into retrocession arrangements with FloodSmart Re Ltd., with those agreements being fully collateralised by the proceeds of the issuance and sale of the two tranches of notes.
Utilising both traditional and alternative reinsurance capital will benefit FEMA significantly as it looks to further de-risk the NFIP.
A broader, deeper and more liquid pool of capital will be available, while transacting with both markets will also help to increase competition in its reinsurance placements, ultimately helping to lower the NFIP’s risk transfer costs.