6 December 2017Insurance

Reinsurers face $1bn Harvey claim from FEMA

The US Federal Emergency Management Agency (FEMA) is submitting a claim to recover the full $1.042 billion in reinsurance coverage under its 2017 Reinsurance Program.

The claim is based upon the National Flood Insurance Program (NFIP)’s losses associated with hurricane Harvey. Those paid losses exceeded the minimum threshold for the NFIP’s reinsurance coverage.

Earlier this year, the NFIP transferred $1.042 billion of the NFIP’s financial risk to the private reinsurance markets, marking a key step towards a stronger and more resilient programme.

In January 2017, FEMA executed the 2017 Reinsurance Agreement with 25 reinsurance markets representing some of the largest insurance and reinsurance groups around the globe. The 2017 placement of reinsurance will cover a portion of NFIP losses above $4 billion arising from Hurricane Harvey, saving taxpayers almost $1 billion.

Under the 2017 reinsurance agreement, reinsurers agreed to indemnify FEMA for flood claims on an occurrence basis. It is structured to cover 26 percent of losses between $4 billion and $8 billion, up to a maximum of $1.042 billion. FEMA paid a total premium of $150 million for the coverage.

On Nov. 6, 2017, FEMA surpassed $4 billion in paid claims to insured flood survivors of hurricane Harvey, triggering the NFIP reinsurance placement. While FEMA is working diligently to understand the full extent of losses to the 2017 NFIP, loss estimates range between $8.5 billion and $9.5 billion, which would mean that FEMA will recover the entire $1.042 billion in reinsurance. FEMA has already sent initial bills to reinsurers.

So far, the trifecta of Hurricanes Harvey, Irma and Maria generated more than 120,000 NFIP claims, marking the second largest claims year in NFIP history. NFIP has paid over $6.69 billion in claims so far, with processing ongoing. Reinsurance will not impact claims payments to insured flood survivors.

FEMA is in the process of securing a new reinsurance placement for 2018.

FEMA received the authority to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012, and the Homeowner Flood Insurance Affordability Act of 2014. Hurricane Sandy claims ($8.3 billion) in October 2012 and Hurricane Katrina claims ($16.3 billion) in August 2005 resulted in programme debt when the cost of flood policy claims far exceeded the NFIP’s premium revenues; reinsurance places the NFIP in a better position to manage losses incurred from similar major events, according to the press release.

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More on this story

29 November 2017   The Lloyd's market has now paid $1.7 billion in claims for hurricanes Harvey, Irma and Maria (HIM).
7 December 2017   A gap of $20 billion between company losses and estimates of total insured losses suggests that some company estimates will rise in 2018, fuelling reinsurance price rises, according to Jefferies analysts.
8 January 2018   The US Federal Emergency Management Agency (FEMA) has increased the amount of reinsurance coverage protecting the National Flood Insurance Program (NFIP) by almost 40 percent.