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Validus finds up to 15% of NFIP flood policies attractively priced

9th March 2017 - Author: Steve Evans

Bermudian insurance and reinsurance company Validus Group has said that after analysing the National Flood Insurance Program’s risk profile, the re/insurer deems that it would underwrite as much of 15% of the risk on its own balance-sheet.

Flooded sign image via 89.3KPCCIt’s a clear indication that the private insurance and reinsurance market is ready and able to help FEMA downsize the National Flood Insurance Program, which to-date has been government backed resulting in a drag on taxpayers.

In recent months, of course, FEMA has begun a process of tapping the reinsurance market for support of the flood insurance portfolio, securing $1.042 billion of coverage at the January renewals, a positive first step in leveraging private capital to back the risk pool.

The next step for FEMA may be two-fold, both upsizing on this use of reinsurance, at a time when the appetite for risk should guarantee access to well-priced capacity, and releasing some of the policies it underwrites which the private re/insurance market is happy to write directly.

Validus executives said at a recent financial market conference that the company performed an analysis of the risk footprint of the NFIP portfolio of flood policies, overlaying it with the re/insurers own internal flood risk model.

Validus found that potentially up to 15% of the NFIP’s risk could be attractively priced, in the reinsurers view, meaning it would be happy to underwrite the risk on its own balance-sheet.

That’s a positive signal for FEMA and the U.S. House Financial Services Committee, which is currently looking at how to take the NFIP program forward and bring the private market further along in support.

If Validus is ready and willing to at least price up to 15% of the risk and consider underwriting it on a direct basis, then other re/insurers would no doubt follow suit.

Bring along the top global reinsurance groups, as well as the capital markets and catastrophe bond investors who would snap up any flood risk cat bond that could be structured, and the NFIP could be downsized significantly in relatively little time.

Privatisation of the NFIP’s risk is once again on the political agenda, with mapping and data being discussed today as an impediment to getting risk into the private market.

Validus has clearly found the data already available sufficient to help it declare an appetite to assume a portion of the risk. With some progress made in terms of data sharing and the political will to allow the private markets to price the risk, where it can, meaningful steps can surely be taken.

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