The Federal Emergency Management Agency (FEMA) has once again procured private sector reinsurance from more than 30 carriers for the National Flood Insurance Program (NFIP) to protect the government program from large losses.
Under the 2021 reinsurance program, FEMA transferred an additional $1.153 billion of the NFIP’s financial risk to the private reinsurance market. This annual reinsurance agreement is effective throughout 2021.
The 2021 reinsurance placement covers portions of NFIP losses above $4 billion arising from a single flooding event. FEMA said it paid a total premium of $195.8 million for the coverage.
The agreement is structured to cover:
- 9.43% of losses between $4 billion and $6 billion.
- 28.084% of losses between $6 billion and $8 billion.
- 20.168% of losses between $8 billion and $10 billion.
“We value the role of private insurance companies and investors in assuming a portion of the NFIP’s flood-risk exposure from catastrophic flood events, which improves long-term financial outcomes for FEMA, the U.S. Treasury and federal taxpayers,” said David Maurstad, FEMA’s senior executive of the NFIP..
He said the NFIP reinsurance program helps the NFIP better prepare financially for potential losses from significant flooding events similar in size to hurricanes Harvey (2017), Sandy (2012) and Katrina (2005), bolsters its claims paying capacity and reduces the reliance on the need to borrow from the U.S, Treasury in the event of large losses.
The NFIP’s Treasury debt is currently about $20 billion.
Combined with the three capital markets reinsurance placements in 2018-20, FEMA has transferred $2.35 billion of the NFIP’s flood risk to the private sector.
FEMA’s 2020 traditional reinsurance placement was worth $1.33 billion in coverage and in 2019 it was for $1.32 billion.
If a named storm flood event is large enough to trigger all reinsurance agreements, FEMA will receive qualifying payments. For named storms resulting in NFIP claims exceeding $10 billion, FEMA will receive the full $2.35 billion of reinsurance coverage from the private markets.
FEMA contracted with reinsurance brokers Guy Carpenter, a subsidiary of Marsh & McLennan, and Aon Reinsurance Solutions, to assist in securing the reinsurance placement.
FEMA received authority to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014. FEMA’s 2021 reinsurance placement builds upon its previous reinsurance placements as further development toward a stronger financial framework.
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