WASHINGTON - Continuing its risk management practice against future catastrophic flood losses, FEMA announced today its 2019 traditional reinsurance placement for the National Flood Insurance Program (NFIP).
Reinsurance is a financial risk management tool used by private insurance companies and public entities to protect themselves from large financial losses. If a catastrophic flood event occurs, the reinsurance companies cover a portion of the NFIP’s losses, reducing FEMA’s need to borrow from the U.S. Treasury to pay claims.
FEMA transferred $1.32 billion of the NFIP’s financial risk to the private reinsurance market. This Reinsurance Agreement is effective from January 1, 2019 to January 1, 2020, with 28 private reinsurance companies.
Combined with the $500 million August 2018 capital markets reinsurance placement, FEMA has transferred $1.82 billion of the NFIP’s flood risk for the 2019 hurricane season to the private sector. If a named storm flood event is large enough to trigger both reinsurance agreements (i.e., a named storm flood event where NFIP claims exceed $5 billion), FEMA would receive payments under both reinsurance agreements.
“It takes an entire community to prepare for disasters, and that includes participation from the private sector. Through reinsurance, FEMA partners with private markets to build a pillar that supports a sound financial framework for the NFIP by a meaningful transfer of flood risk,” said David Maurstad, chief executive of the National Flood Insurance Program.
The 2019 placement of reinsurance covers portions of NFIP losses above $4 billion arising from a single flooding event. FEMA paid a total premium of $186 million for the coverage.
The agreement is structured to cover:
- 14 percent of losses between $4 billion and $6 billion,
- 25.6 percent of losses between $6 billion and $8 billion, and
- 26.6 percent of losses between $8 billion and $10 billion
Historically, the NFIP was limited to using flood insurance premiums, available surplus, borrowing capacity from the U.S. Treasury, and in some cases direct appropriations from Congress to pay flood claims.
FEMA contracted with Guy Carpenter and Company, a subsidiary of Marsh & McLennan Companies, to provide broker services to assist in securing the reinsurance placement. FEMA also contracted with Aon for financial advisory services for the placement.
FEMA received authority to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). FEMA’s 2019 reinsurance placement builds upon its 2017 cornerstone placement and 2018 placements, as further development toward a stronger financial framework.
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