NFIP to secure reinsurance cover via ILS deal

The US Federal Emergency Management Agency (FEMA) plans to secure additional reinsurance cover for the National Flood Insurance Program (NFIP) by engaging the capital markets for the first time through an insurance-linked securities (ILS) transaction on or about July 1, 2018.

This will continue to expand the role of the private markets in managing the nation’s flood risk, the agency said.

FEMA first purchased reinsurance in 2017 and recovered $1.04 billion from the private markets due to losses from Hurricane Harvey. In early January 2018, FEMA continued its practice of resiliency and protection against future floods by securing $1.46 billion in reinsurance from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event occurring in calendar year 2018.

Adding the new “building block” will enable FEMA to transfer risk through two avenues – the traditional reinsurance markets and the capital markets, using tools such as ILS, the agency said. Engaging both markets will create more competition and reduce the NFIP’s risk transfer costs. It will also enable FEMA to access greater market capacity and spread its risk across a more diverse pool of companies and investors.

“The NFIP requires a stronger financial framework built on expanding our portfolio of actuarially-priced policies. Transferring more of the risk burden to the private capital markets continues to be part of that strategy,” said Roy Wright, director of FEMA’s National Flood Insurance Program. “During the second largest loss year in the program’s history, the reinsurance marketplace came through and supported the NFIP. We expanded the traditional reinsurance cover earlier this year. Now we will continue that risk transfer by tapping the capital markets.”

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