The US Federal Emergency Management Agency (FEMA) has successfully transferred $400 million of the National Flood Insurance Program’s (NFIP) flood risk to the capital markets through the issuance of its third catastrophe bond transaction.
The transaction, FloodSmart Re Ltd. (Series 2020-1), is the third time FEMA has entered into a three-year reinsurance agreement with Hannover Re (Ireland) DAC, a subsidiary of reinsurance giant Hannover Re.
Acting on behalf of FEMA, Hannover Re (Ireland) DAC transferred a further $400 million of NFIP flood risk to capital markets investors ahead of the 2020 hurricane season.
As tracked by our sister site Artemis’ extensive catastrophe bond and insurance-linked securities (ILS) Deal Directory, FEMA’s $500 million FloodSmart Re Ltd. (Series 2018-1) deal and its $300 million FloodSmart Re Ltd. (Series 2019-1) transaction, remain in-force.
Combined, FEMA’s three catastrophe bond transactions provide $1.2 billion of reinsurance protection to the NFIP. Furthermore, the agency announced the renewal of its flood reinsurance program at the start of the year, securing $1.33 billion of protection from a panel of 27 reinsurers.
So, with the addition of the latest catastrophe bond transaction, FEMA has transferred $2.53 billion of flood risk to the private sector ahead of the 2020 Atlantic hurricane season.
Under the terms of the latest agreement, FEMA is set to pay $50.28 million in premiums for the first year of reinsurance protection. At the same time, FEMA states that the agreement will cover 33.3% of losses for any single flood event with losses between $6 billion and $9 billion, and 30% if that same event has losses of between $9 billion and $10 billion.
David Maurstad, FEMA’s Deputy Associate Administrator for Insurance and Mitigation, and the senior executive in charge of the NFIP, commented: “Reinsurance is a lynchpin to help strengthen the financial framework of the flood insurance program. By engaging capital markets, FEMA is able to access alternative capital and grow its reinsurance program in a way that benefits policyholders and taxpayers, and expands the role of the private markets in managing flood risk in the United States.”
For FEMA, leveraging the capital markets enables it to both expand and diversify its reinsurance placement for the NFIP, ultimately supporting the protection against future flood losses in the U.S.
