The Federal Emergency Management Agency (FEMA) has announced plans to de-risk the U.S National Flood Insurance Program (NFIP) with additional reinsurance by engaging the capital markets through an insurance-linked securities (ILS) transaction scheduled for July 2018.
FEMA claims this new ‘building block’ will allow it to transfer risk through both traditional reinsurance markets and capital markets, which will promote competition and reduce the NFIP’s risk transfer costs, while also enabling FEMA to spread its risk across a more diverse pool of companies and investors.
The Agency first purchased reinsurance in 2017, allowing it to recover $1.042 billion from the private markets for losses related to Hurricane Harvey.
FEMA has continued this practice in 2018, having secured $1.46 billion in reinsurance from 28 companies to cover NFIP flood losses in excess of $4 billion per event over the year.
Roy Wright, Director of the NFIP, said: “The NFIP requires a stronger financial framework built on expanding our portfolio of actuarially-priced policies. Transferring more of the risk burden to the private capital markets continues to be part of that strategy.
“During the second largest loss year in the program’s history, the reinsurance marketplace came through and supported the NFIP. We expanded the traditional reinsurance cover earlier this year. Now we will continue that risk transfer by tapping the capital markets.”
Congress authorised FEMA to strengthen the NFIP’s financial framework with additional reinsurance from private reinsurance and capital markets under the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014.
FEMA will seek to issue a flood catastrophe bond, which in itself would be revolutionary as the first flood cat bond issuance on record, according to data from our sister site Artemis.
FEMA needs a reinsurer to work with as a transformer and is requesting proposals from interested parties.