Learn How Reinsurance Works
Multi-Year Reinsurance Strategy
The National Flood Insurance Program (NFIP) Reinsurance Program helps FEMA manage the future exposure of the NFIP through the transfer of risk to private reinsurance companies and capital market investors. The NFIP Reinsurance Program promotes private sector participation in flood-risk management. By securing reinsurance at a fair and reasonable cost, FEMA has an additional method to fund payment of flood claims after catastrophic flood events.
Congress granted FEMA authority to secure reinsurance from the private reinsurance and capital markets through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).
How Reinsurance Works
Reinsurance is an important risk management tool used by insurance companies to protect themselves from large financial losses. In other words, reinsurance is insurance for insurance companies. Insurance providers, such as the National Flood Insurance Program, pay premiums to reinsurers. In exchange, reinsurers provide coverage for losses incurred by insurance providers up to a specified amount negotiated by both parties. Similar to insurance for your home, reinsurance acts as a safety net by transferring risk to another party.
There are many different types of reinsurance. The National Flood Insurance Program (NFIP) secures “property catastrophe per occurrence excess of loss” reinsurance. The reinsurance company reimburses an insurer for a share of losses above an agreed-upon deductible. Reinsurance serves an important function as protection against losses from a natural disaster or other catastrophe.
FEMA currently uses two reinsurance strategies to secure reinsurance and transfer NFIP flood risk: 1) “traditional” reinsurance for a one-year term and 2) Insurance-Linked Securities reinsurance (“ILS” reinsurance) involving 3-year catastrophe bonds. ILS reinsurance expires at the end of the three years when the catastrophe bonds mature unless a reinsurance claim exhausts the coverage. FEMA remains committed to growing the NFIP Reinsurance Program and continues to explore additional ways to protect against future flood losses.
Private insurance companies around the world commonly use reinsurance as a tool to manage risk. Public entities also secure reinsurance. Several U.S. states operate insurance providers that utilize reinsurance, including the Citizens Property Insurance Corporation of Florida, the California Earthquake Authority, and the Texas Windstorm Insurance Association.
Read the latest issue of the Watermark, FEMA's quarterly report that provides transparency on the financial state of the National Flood Insurance Program.
Overview of FEMA’s Multi-Year Reinsurance Strategy
Capital Market Reinsurance
The January 2017 traditional reinsurance placement marked a key step towards achieving a stronger and more resilient National Flood Insurance Program. The traditional reinsurance placement is for one-year beginning on Jan. 1-Dec. 31. With the current public notice for the Jan. 2022 placement, this will be the National Flood Insurance Program’s sixth traditional placement.
These traditional reinsurance placements are a key step towards achieving the National Flood Insurance Program’s long-term vision of building a stronger financial framework and places the program in a better position to manage losses incurred from major flood events by transferring exposure to reinsurers.
All insurance proceeds recovered under the NFIP reinsurance agreements will be deposited into the National Flood Insurance Fund.
FEMA Recovered Full Reinsurance Placement Following the 2017 Hurricane Season
As of July 31, 2021, FEMA has paid NFIP policyholders over $9.03 billion for claims resulting from Hurricane Harvey. Therefore, FEMA recovered the entire $1.042 billion in reinsurance under the 2017 traditional reinsurance coverage.
Public Notice for Traditional Reinsurance Placement by Year
All records represent the calendar year from Jan. 1 - Dec. 31.
Summary of Traditional Reinsurance Placements
|Year||Amt of Risk Transferred||Number of Reinsurers||FEMA Premium Paid|
|2022||$1.064 billion||28||$171.9 million|
|2021||$1.153 billion||32||$195.8 million|
|2020||$1.33 billion||27||$205 million|
|2019||$1.32 billion||28||$186 million|
|2018||$1.46 billion||28||$235 million|
|2017||$1.042 billion||25||$150 million|
Capital Market Reinsurance Placements
The August 2018 capital market placement marked the next step of a multi-year strategy and continues to promote private sector participation in flood-risk management. The initial placement was significant because, for the first time, capital markets investors directly backed NFIP reinsurance coverage. FEMA’s inaugural 2018 ILS-reinsurance coverage expired on July 31, 2021 without a reinsurance claim.
After this initial capital market placement, FEMA transferred additional flood risk to the capital markets with additional multi-year ILS reinsurance agreements in April 2019, February 2020, and February 2021. By engaging both the traditional reinsurance markets and the capital markets, the NFIP can reduce risk transfer costs, access greater market capacity, and further diversify its risk transfer partners.
FEMA uses a transformer/fronting reinsurance company for ILS reinsurance (Hannover Re Ireland is the transformer reinsurer for the current ILS reinsurance placements.
The capital market reinsurance placements cover the 50 U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The National Flood Insurance Program has few policies in additional U.S. territories and will have no issues paying flood claims in those territories. As a result, American Samoa, Guam and Northern Mariana Islands are not included in the geographic scope of these placements.
Types of Flood Events and Geographic Areas Covered by the Three Capital Markets Reinsurance Placements
These capital market reinsurance placements only covers risk from “named storms.” A named storm is a storm or storm system that the National Weather Service’s National Hurricane Center has declared to be a tropical cyclone, tropical depression, tropical storm, or hurricane. These reinsurance placements apply to flooding resulting directly or indirectly from a named storm.
A major flood event that is not a named storm would not trigger the FloodSmart 2019-1, FloodSmart 2020-1, and FloodSmart 2021-1 placements. Catastrophe modeling and historical experience indicate that the vast majority of the NFIP’s risk of single flood events causing losses greater than $6.0 billion stem from named storms.
Public Notice for Capital Market Reinsurance Placement by Year
Potential Fiscal Year 2022
Feb. 24, 2021 – Feb. 23, 2024
Feb. 20, 2020 - Feb. 19, 2023
April 17, 2019 - April 16, 2022
Aug. 1, 2018 - July 31, 2021
Summary of the Capital Market Reinsurance Placements
|Year||Duration (3 years)||Premium Paid for the first year||Coverage losses|
|2021||Feb. 23, 2021 – Feb. 22, 2024||$79.44 million||12.5% of losses between $6 billion and $7 billion and 22.5% of losses between $7 billion and $9 billion.|
|2020||Feb. 20, 2020 - Feb. 19 2023||$50.28 million||3.33% of losses between $6 and $9 billion 30% of losses between $9 and $10 billion|
|2019||April 17, 2019 - April 16, 2022||$32 million||2.5% of losses between $6 and $8 billion 12.5% of losses between $8 and $10 billion|
|2018||Aug. 1, 2018 - July 31, 2021||$62 million||3.5% of losses between $5 and $10 billion 13% of losses between $7.5 and $10 billion|
*The 2018 reinsurance coverage terminated without a covered event occurring prior to the expiration of the third and last annual risk period ending on July 31, 2021.
NFIP’s Reinsurance Placements Do Not Affect Policyholders
Reinsurance agreements are between FEMA and reinsurers, and do not impact the NFIP’s contracts with its policyholders. Rather, reinsurance provides the NFIP an additional method to fund payment of flood claims to policyholders and decreases the likelihood that the NFIP will need congressional action to increase its borrowing authority with the U.S. Treasury.
Reinsurance has a cost, but the five traditional reinsurance placements in January 2017-2021 and four capital market placements between August 2018 - February 2021 did not result in an increased rate for NFIP policyholders. As the NFIP Reinsurance Program expands, FEMA will work with the Administration and Congress to determine how to cover the costs of a larger program.
Timing of Reinsurance Payments Has No Effect on Claim Payouts
FEMA is committed to paying claims to policyholders quickly and fully. The timing of reinsurance payments to FEMA under any reinsurance agreement does not impact claims payments to insured flood survivors.
Securing Reinsurance Does Not Impact the NFIP’s Current Debt
FEMA secured reinsurance in 2017-2022 to protect itself against a portion of its potential flood claim liability and provide an additional method to fund payment of flood claims after a catastrophic event. Securing reinsurance does not reduce the size of NFIP’s current debt to the U.S. Treasury; rather, it is intended to reduce the accumulation of future debt.
Why FEMA Hasn’t Recovered Any Reinsurance since the 2017 Hurricane Season
Whether a catastrophic flood event happens in a given year, purchasing reinsurance transfers NFIP risk to the private sector, improving long-term financial outcomes for FEMA, the U.S. Treasury and federal taxpayers. Since the 2017 hurricane season, no qualifying events occurred under either of FEMA’s existing reinsurance agreements.
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