Hooray! This is a step toward private market reclamation of the flood risks some time in the future. The increased (about 40% over the 2017 cover) participation if reinsurers will lead to greater scrutiny of procedures used by FEMA in NFIP, and, hopefully, input/ suggestions as to how to best mitigate the risks. One fear I have is that there will be an expansion, rather than limitation, of primary coverage offerings, relying on the reinsurance covers to subsidize (expected) high frequency risks.
The $235 million premium for the 18% part on $2B xs $4B and 54% of $2B xs $6B covers seems fair, and may be a bargain. But, I am curious as to the split of premiums for each of those two layers…. not posted in the article, and perhaps not available because the NFIP doesn’t understand the value of such data…. to other res who may consider participating in one or both layers in the future.
Actual loss layer transferred is $1.46B = $1.458B = .183 x $2B (xs of $4B) + .543 x $2B (xs of $6B) = $0.372B + $1.086B. This is stated in the opening paragraph.
The loss layers have different premiums for the equal $2B width due to the decreasing loss by size principle. But the $235 million premium can be crudely split between the two layers by proportion of loss transfer, then adjusted judgmentally using the decreasing loss by layer principle;
235 x (.372/1.458) = 235 x .255 = 59.95 ~ 60 Million for $2B xs $4B layer.
Then $175 Million is the cost of the 2nd layer, $2B xs $6B.
And
$2B xs $4B: $60 million per .186 subscription implies $60M/.186 = $323M for full cover of the layer.
$2B xs $6B: $175 Million per .543 subscription implies $175M/.543 = $322M for full cover of the layer.
The total is $645 Million for full subscription of $4B xs $4B.
The above assumes equivalent loss in the two layers, which isn’t true. So a judgmental adjustment of the total $645 Million premium might be, for example, $365 Million for the 1st layer and $280 Million for the higher layer.
The lower participation, 18.3%, on the lower layer vs the 54.3% participation on the higher layer likely implies a relatively high frequency of loss assumption that discourages greater participation on that ‘working layer’ than the higher, exposed layer. It also may signal lack of information needed to give comfort to reinsurers who might have participated on the lower layer, but didn’t.
And, a trivial reason might be the series of 2017 cat losses that decreased some reinsurer’s surplus, spoiling their appetite to take on either layer of reinsurance of NFIP risks.
Participation by reinsurers might be increased IF Congressional action is taken to mitigate high risk flood zones; e.g. the Trump Administration’s proposal to end or limit NFIP cover for NEW construction in high risk flood zones.
Any move towards privatization is a good move. I fear though as usual, the government overpaid. Their timing certainly sucked buying such re-insurance AFTER a bad year pretty much guaranteeing higher prices.
Hooray! This is a step toward private market reclamation of the flood risks some time in the future. The increased (about 40% over the 2017 cover) participation if reinsurers will lead to greater scrutiny of procedures used by FEMA in NFIP, and, hopefully, input/ suggestions as to how to best mitigate the risks. One fear I have is that there will be an expansion, rather than limitation, of primary coverage offerings, relying on the reinsurance covers to subsidize (expected) high frequency risks.
The $235 million premium for the 18% part on $2B xs $4B and 54% of $2B xs $6B covers seems fair, and may be a bargain. But, I am curious as to the split of premiums for each of those two layers…. not posted in the article, and perhaps not available because the NFIP doesn’t understand the value of such data…. to other res who may consider participating in one or both layers in the future.
{more comments to follow after lunch}
Actual loss layer transferred is $1.46B = $1.458B = .183 x $2B (xs of $4B) + .543 x $2B (xs of $6B) = $0.372B + $1.086B. This is stated in the opening paragraph.
The loss layers have different premiums for the equal $2B width due to the decreasing loss by size principle. But the $235 million premium can be crudely split between the two layers by proportion of loss transfer, then adjusted judgmentally using the decreasing loss by layer principle;
235 x (.372/1.458) = 235 x .255 = 59.95 ~ 60 Million for $2B xs $4B layer.
Then $175 Million is the cost of the 2nd layer, $2B xs $6B.
And
$2B xs $4B: $60 million per .186 subscription implies $60M/.186 = $323M for full cover of the layer.
$2B xs $6B: $175 Million per .543 subscription implies $175M/.543 = $322M for full cover of the layer.
The total is $645 Million for full subscription of $4B xs $4B.
The above assumes equivalent loss in the two layers, which isn’t true. So a judgmental adjustment of the total $645 Million premium might be, for example, $365 Million for the 1st layer and $280 Million for the higher layer.
The lower participation, 18.3%, on the lower layer vs the 54.3% participation on the higher layer likely implies a relatively high frequency of loss assumption that discourages greater participation on that ‘working layer’ than the higher, exposed layer. It also may signal lack of information needed to give comfort to reinsurers who might have participated on the lower layer, but didn’t.
And, a trivial reason might be the series of 2017 cat losses that decreased some reinsurer’s surplus, spoiling their appetite to take on either layer of reinsurance of NFIP risks.
Participation by reinsurers might be increased IF Congressional action is taken to mitigate high risk flood zones; e.g. the Trump Administration’s proposal to end or limit NFIP cover for NEW construction in high risk flood zones.
Any move towards privatization is a good move. I fear though as usual, the government overpaid. Their timing certainly sucked buying such re-insurance AFTER a bad year pretty much guaranteeing higher prices.