The Federal Emergency Management Agency (FEMA) has leveraged the reinsurance markets to enhance the National Flood Insurance Program (NFIP).
On March 7, FEMA engaged in its seventh procurement of reinsurance coverage through insurance-linked securities (ILS) reinsurance, with the agency finalizing a three-year reinsurance agreement with Hannover Re (Ireland) Designated Activity Company.
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The deal sees the transfer of $575 million in flood risk from the NFIP to the capital markets via a special purpose insurer, FloodSmart Re Ltd, the entity responsible for sponsoring catastrophe bonds on FEMA’s behalf.
Under the terms of these agreements, FEMA’s premium payments for the first year of coverage are estimated to be approximately $85.7 million, excluding initial costs. The reinsurance coverage delineates specific loss percentages for a single flood event, including 10% for losses ranging from $8 billion to $9 billion and 23.75% for losses between $9 billion and $11 billion.
This reinsurance coverage is also part of FEMA’s ongoing strategy to shift NFIP’s flood risk to the capital markets, a practice that began in 2018. Each reinsurance placement has a three-year duration, with amounts secured in March 2023 ($275 million) and February 2022 ($450 million).
When combined with existing coverage through FloodSmart 2022-1 bonds, FloodSmart 2023-1 bonds, and a traditional reinsurance placement in January 2024, FEMA has effectively transferred $1.92 billion of the NFIP’s flood risk to the private sector in anticipation of the 2024 hurricane season.
David Maurstad, FEMA’s assistant administrator for the Federal Insurance Directorate and senior executive of the NFIP, expressed satisfaction with the terms obtained.
“I’m pleased that FEMA has successfully secured favorable terms for this year’s capital market reinsurance and retained our current level of reinsurance coverage at acceptable rates,” Maurstad said.
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