1 August 2018Alternative Risk Transfer

NFIP places $500m cat bond

The Federal Emergency Management Agency (FEMA) has secured $500 million in reinsurance for its National Flood Insurance Program (NFIP) through capital markets.

FEMA entered into a three-year reinsurance agreement, effective Aug. 1, 2018, with Hannover Re which enabled the transfer of NFIP’s financial risk to capital markets investors by sponsoring the issuance of a catastrophe bond through a special purpose reinsurer.

“Reinsurance is a lynchpin to help strengthen the financial framework of the NFIP,” said NFIP CEO David Maurstad. “Engaging capital markets was the logical next step in maturing the NFIP reinsurance programme in a way that benefits policyholders and taxpayers, and expands the role of the private markets in managing flood risk in the United States,” Maurstad added.

As part of the new agreement, Hannover Re will indemnify FEMA for a portion of flood claims that result from a qualifying flood event that occurs between the dates of Aug. 1, 2018 and July 31, 2021. The agreement is structured to cover, for a given flood event, 3.5 percent of losses between $5 billion and $10 billion, and 13 percent of losses between $7.5 billion and $10 billion. FEMA will pay $62 million in premium for the first year of coverage.

This placement complements the NFIP’s existing traditional reinsurance coverage for calendar year 2018. Effective Jan. 1, 2018, FEMA secured $1.46 billion in traditional reinsurance coverage for a term of one year from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event. Through the deal, FEMA expanded its cornerstone reinsurance placement by 40 percent.

Combined with the January 2018 traditional reinsurance placement, the August 2018 placement enables FEMA to transfer $1.96 billion of the NFIP’s flood risk for the 2018 hurricane season to the private sector. By engaging both the traditional reinsurance markets and the capital markets, the NFIP can reduce risk transfer costs, access greater market capacity, and further diversify its risk transfer partners, FEMA explained in a statement.

Previously, effective Jan. 1, 2017, FEMA had secured $1.04 billion of traditional reinsurance coverage from 25 reinsurance companies. Following Hurricane Harvey, FEMA recovered the full $1.04 billion from its reinsurers.

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