A historic development has occurred in the United States which could see more flood insurance risk making its way into the reinsurance and capital markets, as FEMA has bought its first ever reinsurance cover for the National Flood Insurance Program.
FEMA has launched the National Flood Insurance Program 2016 Reinsurance Initiative to help it to more actively manage its financial risk.
In recent years due to the high costs of flooding disasters in the U.S., the cost of flood claims has far exceeded the amount of premiums coming into the NFIP leaving the system $23 billion in debt to the U.S. Treasury.
So, with approval from Congress under the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014), FEMA has now received approval to seek out reinsurance protection from both the traditional and capital markets.
The aim is to diversify the range of financial tools available to the Federal Insurance and Mitigation Administration (FIMA) through the NFIP Reinsurance Initiative, to help it better manage catastrophic flood events.
In the first instance, to help the NFIP share its flood risk with private reinsurance companies, FEMA has purchased $1 million of reinsurance protection from three reinsurance carriers.
It’s seen as a test of sorts, proving the concept and helping FEMA and the NFIP to put the processes in place to access the reinsurance and capital markets more meaningfully in 2017.
The first reinsurance purchase was from Transatlantic Reinsurance Company, Swiss Re America Corporation, and Munich Reinsurance America, Inc., with Guy Carpenter providing brokerage services.
Reinsurance won’t climate the NFIP’s debt, FEMA notes, but it will help it to better manage future catastrophes and with a long term reinsurance strategy in place the dept should come down over time.
FEMA now aims to expand the NFIP’s reinsurance program in January 2017, with the capital markets one potential source of capacity available to it.
Could we see the NFIP tapping collateralised reinsurance markets or even sponsoring a catastrophe bond? That would be ground-breaking indeed, bringing a new peril of U.S. flood more meaningfully into the insurance-linked securities (ILS) market, which would be welcomed by investors and ILS fund managers alike....MORE