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National Flood Insurance Program’s Reinsurance Program

Public Notices & Placement Summaries

Learn How Reinsurance Works

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 markets 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 Homeowners Flood Insurance Affordability Act of 2014 (HFIAA). The January 2017 reinsurance placement marked a key step towards achieving a stronger and more resilient NFIP. The April 2019 capital markets placement marked the next step of a multi-year strategy and promotes private sector participation in flood-risk management. FEMA is committed to growing the NFIP Reinsurance Program to protect against future flood losses.

Public Notices of Intended Procurement of Reinsurance & Placement Summaries

Understanding the NFIP Reinsurance Program

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.

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.

Why FEMA Didn’t Recover Any Reinsurance as a Result of the 2019 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. During the 2019 hurricane season no qualifying events occurred under either of FEMA’s existing reinsurance agreements.

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 four traditional reinsurance placements in January 2017-2020 and the capital market placements in August 2018, April 2019 and February 2020 did not result in an increase in NFIP policyholders’ rates. As the NFIP Reinsurance Program expands in the future, 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 2017-2020 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.

Overview of FEMA’s Multi-Year Reinsurance Strategy

The 2017 reinsurance placement was a key step towards achieving the National Flood Insurance Program’s long-term vision of building a stronger financial framework and placed the program in a better position to manage losses incurred from major flood events by transferring exposure to reinsurers. These one-year traditional reinsurance placements continued each year in 2018-20.

 In August 2018, FEMA entered into its first three-year reinsurance agreement to transfer $500 million in flood risk to the capital markets. FEMA continued to transfer flood risk to the capital markets with three-year reinsurance agreements in April 2019 and February 2020.  The funds transferred for these reinsurance agreements are $300 million and $400 million, respectively.

Next steps include expanding the NFIP Reinsurance Program and preparing for future engagements with the reinsurance markets.

In practice, this looks like:

  • Clarifying the Reinsurance Program’s vision, strategy and operations based on lessons learned to build a multi-year strategy;
  • Expanding the NFIP’s flood modeling capabilities to inform pricing and business strategies;
  • Exploring additional forms of reinsurance; and
  • Engaging industry partners to better inform the NFIP as it continues to build the reinsurance program.

Types of Flood Events and Geographic Areas Covered by the Three Capital Markets Reinsurance Placements

Whereas the NFIP’s January 2020 traditional reinsurance placement applies to all flood losses covered under the NFIP, the August 2018, April 2019 and February 2020 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 three capital market reinsurance placements apply to flooding resulting directly or indirectly from a named storm. However, a major flood event that is not a named storm would not trigger the August 2018 and April 2019 placements. Catastrophe modeling and historical experience indicate that the vast majority of the NFIP’s risk of single flood events causing losses greater than $4.315 billion (the level at which the August 2018 placement reset would trigger) stem from named storms.

The NFIP’s January 2020 traditional reinsurance placement covers all geographic areas where the NFIP writes flood insurance, including all U.S. territories. In contrast, the August 2018, April 2019 and February 2020 placements cover the 50 U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The NFIP has few policies in U.S. territories not included in the geographic scope of the August 2018, April 2019 and February 2020 placements, and will have no issues paying flood claims in those territories.

FEMA Recovered Full Reinsurance Placement Following the 2017 Hurricane Season

As of June 30, 2019, FEMA has paid NFIP policyholders over $8.96 billion for claims resulting from Hurricane Harvey. Therefore, FEMA recovered the entire $1.042 billion in reinsurance under the 2017 traditional reinsurance coverage.

Last updated October 28, 2020