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FEMA returns to capital markets for $300m NFIP risk transfer

18th April 2019 - Author: Charlie Wood

The US Federal Emergency Management Agency (FEMA) has returned to the capital markets, entering into an agreement with Hannover Re (Ireland) Designated Activity Company (DAC) and securing $300 million of collateralised reinsurance protection for the National Flood Insurance Program (NFIP) from insurance-linked securities (ILS) investors.

femaIn August 2018, FEMA secured $500 million of capital markets-backed reinsurance protection for its flood insurance program, via FloodSmart Re Ltd. (Series 2018-1), a deal that was well received by the increasingly mature and sophisticated ILS investor base.

Following the successful completion of its first catastrophe bond transaction, FEMA has returned to the capital markets less than a year later, again leveraging its Bermuda-based special purpose insurance vehicle, FloodSmart Re Ltd.

Reinsurance giant Hannover Re acted as the ceding reinsurer for the transaction, providing reinsurance coverage to FEMA and its NFIP.

The agreement is structured to cover, for a given flood event, 2.5% of losses between $6 billion and $8 billion, and 12.5% of losses between $8 billion and $10 billion.

FEMA will pay $32 million in premium for the first year of reinsurance coverage.

Ultimately, the transferring of risks from the NFIP to the capital markets enables FEMA to better secure the flood program, while ensuring it has the ability to pay flood claims, which have been on the rise in the U.S. in recent times.

FEMA is currently restructuring parts of the NFIP, announcing changing to its pricing structure where premiums will be tied to the actual flood risk of individual homes, a move that could lead to the transfer of more risk to the reinsurance industry and the capital markets.

Combined with the August 2018 capital market and January 2019 traditional reinsurance placements, ahead of the 2019 hurricane season, FEMA has transferred $2.12 billion of the NFIP’s flood risk to the private sector.

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