Continuing its risk management practice against future catastrophic flood losses, FEMA announced today its 2020 traditional reinsurance placement for the National Flood Insurance Program (NFIP).
Reinsurance is a financial risk management tool used by private insurance companies and public entities to protect themselves from large financial losses. If a qualifying catastrophic flood event occurs, the reinsurance companies cover a portion of the NFIP’s losses, contributing to FEMA’s ability to pay claims before it needs to borrow from the U.S. Treasury.
FEMA transferred an additional $1.33 billion of the NFIP’s financial risk to the private reinsurance market. This annual Reinsurance Agreement is effective from January 1, 2020 to January 1, 2021, with 27 private reinsurance companies.
The 2020 placement of reinsurance covers portions of NFIP losses above $4 billion arising from a single flood event. FEMA paid a total premium of $205 million for the coverage.
The agreement is structured to cover:
- 10.25 percent of losses between $4 billion and $6 billion,
- 34.68 percent of losses between $6 billion and $8 billion, and
- 21.80 percent of losses between $8 billion and $10 billion.
Combined with the $500 million August 2018 capital markets reinsurance placement and the $300 million April 2019 capital markets reinsurance placement, FEMA has transferred $2.13 billion of the NFIP’s flood risk for the 2020 hurricane season to the private sector. If a named storm event is large enough to trigger all reinsurance agreements (i.e., a named storm event where NFIP claims exceed $6 billion), FEMA would receive qualifying payments under all reinsurance agreements. Should a named storm event result in NFIP claims exceeding $10 billion, FEMA would receive the full $2.13 billion of reinsurance coverage from the private markets.
“It takes the whole community to prepare for disasters, and that includes participation from the private sector. Through reinsurance, FEMA partners with private markets to build a pillar that supports a sound financial framework for the NFIP by a meaningful transfer of flood risk,” said David Maurstad, Deputy Associate Administrator of the National Flood Insurance Program.
Historically, the NFIP was limited to using flood insurance premiums, available surplus, borrowing capacity from the U.S. Treasury, and in some cases, direct appropriations from Congress to pay flood claims.
FEMA contracted with Guy Carpenter and Company, a subsidiary of Marsh & McLennan Companies, to provide broker services to assist in securing the reinsurance placement. FEMA also contracted with Aon for financial advisory services for the placement.
FEMA received authority to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). FEMA’s 2020 reinsurance placement builds upon its previous reinsurance placements as further development toward a stronger financial framework.
