Reinsurers face growth opportunity in US flood risk

The US National Flood Insurance Program (NFIP) has tested the transfer of flood risk to the private reinsurance sector, paving the way for a large-scale privatisation of US flood risk.

The NFIP was established in 1968 to help offer flood insurance to homeowners, renters, and business owners and is the primary underwriter of flood insurance policies in the United States.

The programme has relied on the US Treasury to fund deficits when losses have exceeded the programme’s claims. NFIP has accrued $23 billion in losses to the U.S. Treasury.

NFIP has never used a financial risk transfer mechanism but a recent test has been interpreted as ‘successful’ by experts.

Reinsurers can now prepare to underwrite larger volumes of the US flood programme. Total earned premium of the NFIP was $3.45 billion in 2015.

“The NFIP has already submitted a budget request to allow for the payment of reinsurance premiums,” said Pete Thomas, chief risk officer at Willis Re.

The demand for reinsurance cover from the NFIP programme will come to the market at a time when the property/casualty business is suffering from overcapacity. A historically low interest rate environment has attracted capital to the sector as investors were seeking for yield. In addition, comparatively low losses have added to the current soft market. The increased reinsurance demand from the NFIP programme should therefore be welcomed by the industry.

“When we discuss growth strategies with reinsurers, flood risk is nearly always a main topic of discussion,” says Bill Fleischhacker, Aon Benfield executive managing director and treaty reinsurance broker. “With today's available analytics, which are evolving to reduce uncertainty and sharpen confidence, many major reinsurers are pursuing flood opportunities through dedicated resources that contemplate all aspects of the US flood market, including opportunities to support FEMA (Federal Emergency Management Agency) on a risk bearing basis,” Fleischhacker explains.

However, challenges for reinsurers to participate in the risk transfer include data quality and control, difficulty of pricing the risk and regulatory requirements determining which reinsurers will be allowed to participate.

This news story is a snapshot of a longer report. To find out more, read the full story here.