The US Federal Emergency Management Agency (FEMA) has transferred an additional $575 million of the National Flood Insurance Program’s (NFIP) flood risk to the capital markets through the sponsor of its fourth catastrophe bond transaction.
FloodSmart Re Ltd. (Series 2021-1) is FEMA’s fourth and largest catastrophe bond transaction, providing $575 million of flood reinsurance protection from the capital markets for the NFIP.
For this deal, FEMA has entered into a three-year reinsurance arrangement with Hannover Re (Ireland) DAC, a subsidiary of the global reinsurer, which in turn transferred the slice of the NFIP’s financial flood risk to third-party investors.
For the first year of coverage, FEMA will pay $79.44 million in premiums. The agreement covers 12.5% of losses for any single flood event with losses between $6 billion and $7 billion, and 22.5% if that same flood event drives losses of between $7 billion to $9 billion.
FEMA’s Deputy Associate Administrator for Insurance and Mitigation, David Maurstad, the senior executive in charge of the National Flood Insurance Program, commented: “FEMA continues to view reinsurance as an integral tool in helping strengthen the fiscal structure of the NFIP.
“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.”
This latest issuance follows the $400 million transaction announced in 2020, a $300 million deal in 2019, and FEMA’s first entry into the market in 2018, a $500 million transaction.
As previously announced, combined with the three deals mentioned above and its January 1st, 2021 traditional reinsurance placement, FEMA has transferred some $2.928 billion of the NFIP’s flood risk to the private sector ahead of the 2021 Atlantic hurricane season. Of this, $500 million, so the first cat bond issuance, is scheduled to mature in August of this year.
