The Federal Emergency Management Agency announced today its August 1, 2018 reinsurance placement for the National Flood Insurance Program (NFIP). For the first time, FEMA has secured reinsurance directly backed by capital markets investors, continuing efforts to better manage the program’s financial risk.
FEMA enters into a three-year reinsurance agreement, effective August 1, 2018, with Hannover Re (Ireland) Designated Activity Company (DAC), a reinsurance company. Hannover Re acted as a “transformer,” transferring $500 million of the NFIP’s financial risk to capital markets investors by sponsoring the issuance of a catastrophe bond through a special purpose reinsurer. This placement complements the NFIP’s existing traditional reinsurance coverage for calendar year 2018.
“Reinsurance is a lynchpin to help strengthen the financial framework of the NFIP,” said David Maurstad, chief executive of the National Flood Insurance Program. “Engaging capital markets was the logical next step in maturing the NFIP Reinsurance Program in a way that benefits policyholders and taxpayers, and expands the role of the private markets in managing flood risk in the United States.”
Under the August 2018 reinsurance 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 August 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.
