FEMA Transfers More Flood Risk with $300 Million Cat Bond

April 23, 2019

The Federal Emergency Management Agency (FEMA) has again turned to private reinsurance markets to help strengthen the financial framework of the National Flood Insurance Program (NFIP).

Last week FEMA entered into a three-year reinsurance agreement, effective April 17, 2019, with Hannover Re (Ireland) Designated Activity Company (DAC). Hannover Re acted as a “transformer,” transferring $300 million of the NFIP’s financial risk to capital markets investors by sponsoring the issuance of a catastrophe bond through a special purpose reinsurer.

FEMA said it will pay $32 million in premium for the first year of reinsurance coverage. The agreement is structured to cover, for a given flood event, 2.5 percent of losses between $6 billion and $8 billion, and 12.5 percent of losses between $8 billion and $10 billion.

This placement builds on the first transfer of NFIP flood risk to capital markets investors in August 2018, which transferred $500 million in flood risk for three years.

FEMA said these these capital market placements complement the NFIP’s existing traditional reinsurance coverage, allowing FEMA to grow the NFIP Reinsurance Program that protect against future flood losses. Combined with the August 2018 capital market and January 2019 traditional reinsurance placements, ahead of the 2019 hurricane season, FEMA has transferred $2.12 billion of the NFIP’s flood risk to the private sector.

“Our continued engagement with the capital markets contributes to FEMA’s commitment to strengthening the financial framework of the NFIP, is beneficial to policyholders and taxpayers, and is a viable example of the role private markets can play in managing U.S. flood risk,” said David Maurstad, chief executive of the NFIP.

FEMA began its reinsurance program in 2016, transferring $1 million in NFIP risk to private reinsurers for the period Sept. 19, 2016 through March 19, 2017. It followed that with a much bigger $1 billion reinsurance deal effective January 1, 2017 through January 1, 2018 with a group of 25 reinsurers. For 2018, that deal was expanded to $1.46 billion with 28 reinsurers.

For this latest placement, FEMA contracted with Aon Securities to serve as structuring agent and with Guy Carpenter and GC Securities, a division of MMC Securities LLC, which is a subsidiary of Marsh & McLennan Companies, for financial advisory services. Aon Securities served as book runner, marketing the catastrophe bond to capital markets investors. KatRisk, a catastrophe modeler, analyzed NFIP risk for investors.

The NFIP is not the only government insurance program employing private reinsurance. A number of states have reinsurance programs including Florida (Citizens Property Insurance), California (California Earthquake Authority) and Texas (Texas Windstorm Insurance Association).

Source: FEMA

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