FEMA continues to engage reinsurance markets to help strengthen the financial framework of the National Flood Insurance Program (NFIP) and promote private sector participation in floodrisk management.
On, April 16, 2019, FEMA entered into a three-year reinsurance agreement, effective April 17, 2019, with Hannover Re (Ireland) Designated Activity Company (DAC). Hannover Re acted as a “transformer,” transferring $300 million of the NFIP’s financial risk to capital markets investors by sponsoring the issuance of a catastrophe bond through a special purpose reinsurer. FEMA will pay $32 million in premium for the first year of reinsurance coverage. The agreement is structured to cover, for a given flood event, 2.5 percent of losses between $6 billion and $8 billion, and 12.5 percent of losses between $8 billion and $10 billion.
This placement builds on the first transfer of NFIP flood risk to capital markets investors in August 2018, which transferred $500 million in flood risk for three years. These capital market placements complement the NFIP’s existing traditional reinsurance coverage, allowing FEMA to grow the NFIP Reinsurance Program that protect against future flood losses. 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.
By engaging both the traditional reinsurance markets and the capital markets, the NFIP can reduce risk transfer costs, access additional market capacity, and further diversify its reinsurance partners.
With reinsurance, private companies assume a portion of the NFIP’s flood-risk exposure from catastrophic flood events in exchange for premium payments. If such an event occurs, the reinsurance companies cover a portion of the NFIP’s losses, reducing FEMA’s need to borrow from the U.S. Treasury to pay claims. With the reinsurance program in place in 2017, the NFIP recovered $1.042 billion from the private markets due to losses from Hurricane Harvey.
FEMA received authority to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).
FEMA is committed to further developing and maturing the NFIP Reinsurance Program in a
manner that helps strengthen the financial framework of the NFIP, is beneficial to policyholders and taxpayers, and expands the role of the private markets in managing U.S. flood risk. Later today, more information will be posted on the NFIP Reinsurance Program webpage at: https://www.fema.gov/nfip-reinsurance-program.
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