FEMA renews $1.32bn NFIP reinsurance programme for 2019 with 28 carriers

The Federal Emergency Management Agency (FEMA) has reduced the size of its annual reinsurance placement which provides coverage for the National Flood Insurance Program (NFIP).

FEMA placed $1.32 billion of the NFIP’s financial risk with 28 reinsurers for the year, a reduction on the 1.46 billion it placed a year earlier. However, the premium it paid was the same, indicating an increase in rates year on year.

The placement complements $500 million of coverage it secured in August 2018 via a placement into the capital markets – in effect a cat bond. This means that in total FEMA has transferred $1.82 billion of the NFIP’s flood risk for the 2019 hurricane season to the private sector.

The 2019 placement of reinsurance covers portions of NFIP losses above $4 billion arising from a single flooding event. FEMA paid a total premium of $186 million for the coverage.

The agreement is structured to cover: 14 percent of losses between $4 billion and $6 billion; 25.6 percent of losses between $6 billion and $8 billion; and 26.6 percent of losses between $8 billion and $10 billion.

If a named storm flood event is large enough to trigger both reinsurance agreements (a named storm flood event where NFIP claims exceed $5 billion), FEMA would receive payments under both reinsurance agreements.

“It takes an entire community to prepare for disasters, and that includes participation from the private sector. Through reinsurance, FEMA partners with private markets to build a pillar that supports a sound financial framework for the NFIP by a meaningful transfer of flood risk,” said David Maurstad, chief executive of the NFIP.

Historically, the NFIP was limited to using flood insurance premiums, available surplus, borrowing capacity from the US Treasury, and in some cases direct appropriations from Congress to pay flood claims.

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).

The placement was also welcomed by Frank Nutter, president of the Reinsurance Association of America. Nutter said: "The RAA has long advocated for the NFIP to utilize private reinsurance, and the successful placement of this reinsurance coverage for the third year is a significant milestone. The placement confirms FEMA’s commitment to expanding reinsurance coverage and the financial protections it will afford American taxpayers."

FEMA contracted with Guy Carpenter and Company, a subsidiary of Marsh & McLennan Companies, to provide broker services, and with Aon for financial advisory services for the placement.

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