In September 2016, FEMA secured its first placement of reinsurance for the National Flood Insurance Program (NFIP), setting the foundation for a larger and more robust placement the following year.
In January 2017, FEMA expanded its September 2016 placement and transferred $1.042 billion of the NFIP’s financial risk to 25 reinsurers through January 1, 2018. The 2017 placement puts the NFIP in a better position to manage losses incurred from major events like Hurricanes Sandy ($8.3 billion) and Katrina ($16.3 billion) by transferring exposure to reinsurers.
FEMA gained the 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 placement of reinsurance marked a key step towards achieving a stronger and more resilient NFIP, and sets the foundation for a multi-year reinsurance program.
For additional information on the NFIP’s Reinsurance Program, refer to the story on FEMA’s blog post, “Increasing Flood Insurance Resilience – The Role of Reinsurance”.
NFIP Reinsurance program FAQs
Q: What is reinsurance?
A: 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 pay premiums to reinsurers. In exchange, reinsurers provide coverage for losses incurred by insurance providers up to a specified amount that is 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) secured “catastrophe property excess of loss” reinsurance. Similar to a homeowner’s insurance policy, 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. In fact, several U.S states already have reinsurance programs, including Florida (the Citizens Property Insurance Corporation of Florida), California (the California Earthquake Authority), and Texas (the Texas Windstorm Insurance Association).
Q: What is FEMA’s National Flood Insurance Program (NFIP) Reinsurance Program?
A: The National Flood Insurance Program (NFIP) Reinsurance Program helps FEMA manage the future exposure of the NFIP through the transfer of risk to private reinsurers. With the impacts of several large flood disasters over the past years, the NFIP experienced situations where the cost of policy claims far exceeded the amount of premiums and accumulated surplus. This resulted in the NFIP incurring a debt to the U.S. Treasury of $23 billion.
Through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA), FEMA received the authority to secure reinsurance from the private reinsurance and capital markets. In response, FEMA created the NFIP Reinsurance Program to be financially prepared for potential losses from significant flooding events similar to Hurricanes Katrina and Sandy.
In September 2016, the NFIP Reinsurance Initiative Team took a measured step and secured a small reinsurance placement to identify and resolve any barriers or issues in advance of a larger implementation. In early January 2017, FEMA secured a much larger reinsurance placement at the federal level.
In 2017, the NFIP Reinsurance Program will:
- Diversify the tools FEMA uses to manage the financial consequences of major flood risk by obtaining reinsurance in January 2017;
- Lay the cornerstone for a multi-year program;
- Extend the NFIP’s claims-paying ability to avoid adverse outcomes by securing reinsurance at a fair and reasonable cost; and
- Promote private sector participation in flood-risk management.
Q: Why secure reinsurance now?
A: The National Flood Insurance Program (NFIP) is part of FEMA’s Federal Insurance and Mitigation Administration (FIMA), and is the primary provider of flood insurance across the United States. In the past 11 years, the United States has experienced many devastating flood disasters, particularly in 2005, 2008, and 2012. Flood insurance claims have far exceeded the amount of funds available to pay them, resulting in a $23 billion debt to the U.S. Treasury.
In the wake of these large flood events, and as authorized by Congress, FEMA took steps towards more actively managing its financial risk by launching a Reinsurance Program in January 2017.
- Historically, flood insurance premiums, available surplus, borrowing capacity from the U.S. Treasury, and in some cases direct Congressional appropriations, were available to FEMA to pay the claims of insured flood survivors.
- Through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), FEMA received the authority to secure reinsurance from the private reinsurance and capital markets.
- Under the authority granted by Congress, FEMA conducted a study to understand the financial benefits of reinsurance. Shortly thereafter, it launched the NFIP Reinsurance Initiative in 2016 to make the first ever placement of reinsurance for the federal government.
- In January 2017, the NFIP launched the Reinsurance Program, and in-so-doing transferred $1.042 billion of its risk to private reinsurance markets at a fair and reasonable price to the federal government.
Q: What did FEMA actually buy?
A: FEMA entered into agreements with 25 reinsurers to transfer $1.042 billion in flood risk. The reinsurance premium is $150 million, and will span from January 1, 2017 through January 1, 2018.. Under this agreement, the reinsurers will cover 26 percent of losses between $4 billion and $8 billion arising from a single flooding event. Recent modeling of the NFIP portfolio suggests there is a 17.2 percent chance of losses from an event exceeding $4 billion in in 2017.
This placement is a key step towards achieving the NFIP’s long-term vision of building a stronger financial framework. It places the NFIP in a better position to manage losses incurred from major events like Hurricane Sandy ($8.3 billion) in October 2012 and Hurricane Katrina ($16.3 billion) in August 2005 by transferring exposure to reinsurers.
Q: How does securing reinsurance affect the current National Flood Insurance Program’s $23 billion debt?
A: One of the reasons FEMA secured reinsurance was to increase the NFIP’s flood claims-paying ability by protecting itself against a portion of its potential losses. Securing reinsurance does not reduce the size of NFIP’s current Treasury debt; rather, it is intended to reduce the accumulation of future debt.
Q: Does the placement of reinsurance affect policyholders?
A: With the placement of reinsurance, the NFIP retains its ability to pay out claims to policyholders quickly and fully, and it is less likely to need Congressional action to increase its borrowing authority.
The reinsurance agreement is between FEMA and reinsurers, and therefore will not impact the NFIP’s policy with its policyholders.
Reinsurance has a cost, but the January 2017 reinsurance placement did not result in an increase to flood insurance policyholders’ rates. If the Program expands in the future, FEMA will work with the Administration and Congress to determine how to cover the costs of a larger NFIP Reinsurance Program.
Q: What is the experience of FEMA with using reinsurance?
A: The January 2017 placement was the second time FEMA secured reinsurance. FEMA secured a smaller amount of reinsurance in September 2016, marking the first-ever purchase of its kind by the federal government. For both placements, FEMA contracted with Guy Carpenter and Company, a subsidiary of Marsh & McLennan Companies, to provide broker services to assist in securing the reinsurance placements.
For more information about the September 2016 placement, please refer to the blog post “Testing a New Tool to Strengthen Flood Insurance.”
Q: What happens next?
A: In January 2017, FEMA made a cornerstone placement of reinsurance to establish a multi-year NFIP Reinsurance Program.
Next steps include solidifying the NFIP Reinsurance Program and preparing for future engagements with risk transfer markets in January 2018.
In practice, this looks like:
- Upgrading the Reinsurance Program’s vision, strategy and operations based on 2017 lessons learned to optimize a future multi-year program.
- Expanding the NFIP’s flood modeling capabilities.
- Engaging industry partners to incorporate best practices from the private sector.
The multi-year Reinsurance Program vision is:
- Financial Strength: To strengthen the NFIP’s financial standing by sharing financial risk with private industry at a price that is fair to the Federal Government.
- Level of Risk: To manage claims exposure by lessening the need to incur additional Treasury debt.
- Stability: To stabilize NFIP’s annual expenditures in order to operate within a predictable and defensible annual budget.
- Customer Experience: To foster strong trust-based relationships with policyholders based on delivering consistently outstanding support during and after major floods.
- Efficiency: To institutionalize effective program and financial management discipline to ensure informed, data-based decision making.
- Transparency: To enhance the credibility of the NFIP with federal and congressional decision-makers and private sector thought leaders through the bilateral learning and sharing of detailed risk information with them and the private market.
Public Notice of the FEMA Intended Procurement of Reinsurance for NFIP
The Federal Emergency Management Agency (“FEMA”) will be procuring reinsurance for the National Flood Insurance Program (“NFIP”) to be effective on or about January 1, 2017. To participate in the reinsurance procurement, vendors must submit a request to participate by December 15, 2016, and final tenders by December 23, 2016.
NOTICE: Pursuant to the World Trade Organization (“WTO”), Agreement on Government Procurement (“GPA”), as amended on March 30, 2012, FEMA, the procuring entity, is hereby providing notice of its intended procurement of reinsurance for the NFIP. For more information, refer to Art. VII of the GPA, Exhibit A. FEMA is not securing reinsurance through the Federal Acquisition Regulations (“FAR”) and reinsurers will not be consider Federal contractors.
FEMA provides Notice on the following:
- The name and address of the procuring entity and other information necessary to contact the procuring entity and obtain all relevant documents relating to the procurement, and their cost and terms of payment, if any;
FEMA intends to procure reinsurance for flood risk in the United States insured by the NFIP. Guy Carpenter and Company is FEMA’s broker and will act as the third-party intermediary for the intended procurement of reinsurance referenced in this notice. Contact Guy Carpenter at FEMA.GC@guycarp.com for any information and relevant documentation relating to the procurement.
In addition, you may contact a representative of FEMA regarding this procurement at FEMA-NFIP-REINSURANCE@fema.dhs.gov.
- A description of the procurement, including the nature and the quantity of the goods or services to be procured or, where the quantity is not known, the estimated quantity;
FEMA intends to procure reinsurance on or about January 1, 2017, to be effective for one year. The procurement of reinsurance will be an agreement of indemnity between FEMA and private reinsurance firms. FEMA will pay a reinsurance premium to transfer a portion of the NFIP’s flood-risk to the counterparties (reinsurers). The reinsurers will be responsible for the payment of potential NFIP losses as defined by the reinsurance agreement. The amount of reinsurance and the design of the reinsurance program will remain undisclosed until determined otherwise by FEMA.
- For recurring contracts, an estimate, if possible, of the timing of subsequent notices of intended procurement;
This provision is not applicable to this reinsurance procurement.
- A description of any options;
This provision is not applicable to this reinsurance procurement.
- The time-frame for delivery of goods or services or the duration of the contract;
The duration of the reinsurance treaty will be one year to begin on or about January 1, 2017.
- The procurement method that will be used and whether it will involve negotiation or electronic auction;
FEMA intends to procure reinsurance by following standard reinsurance industry practices, including soliciting quotes from a select group of reinsurers known as a quoting panel. From the quotes provided and subject to further negotiations, FEMA will determine Firm Order Terms and disseminate the terms via email to all reinsurers who meet the minimum criteria listed below in Section (j) interested in participating in the FEMA reinsurance program. This reinsurance procurement will not be available through Federal Business Opportunities, because FEMA will secure reinsurance outside the FAR.
- Where applicable, the address and any final date for the submission of requests for participation in the procurement;
The final date for the submission of request for participation will be December 15, 2016. Refer to Section (a) for contact information.
- The address and the final date for the submission of tenders;
The final date for the submission of tenders is December 23, 2016. Refer to Section (a) for contact information.
- The language or languages in which tenders or requests for participation may be submitted, if they may be submitted in a language other than an official language of the Party of the procuring entity;
The notice and intended procurement will be in English (United States).
- A list and brief description of any conditions for participation of suppliers, including any requirements for specific documents or certifications to be provided by suppliers in connection therewith, unless such requirements are included in tender documentation that is made available to all interested suppliers at the same time as the notice of intended procurement;
Below is a list and brief description of conditions for participation of reinsurers:
- Ability to write property catastrophic excess of loss reinsurance in the United States;
- Fulfillment of minimum financial requirements measured by an:
- A.M. Best rating of A- or better,
- For Underwriting Members of Lloyd’s, Lloyd’s market rating of A- or better,
- S&P rating of BBB+ or better, and
- Policyholder Surplus of at least $350 million,
- Satisfactory outcome of appropriate financial analyses (e.g., measurements of liquidity, leverage, capital adequacy); and
- Payment of taxes pursuant to country or jurisdiction in which the reinsurance company operates.
Conditions and Restrictions:
Except as authorized by the Office of Foreign Assets Control (OFAC) in the Department of the Treasury, potential reinsurance companies shall not acquire, for use in the performance of the intended NFIP reinsurance treaty, any supplies or services if any proclamation, Executive Order, or statute administered by OFAC, or if OFAC’s implementing regulations at 31 CFR Chapter V, would prohibit such a transaction by a person subject to the jurisdiction of the United States.
Except as authorized by OFAC, most transactions involving Cuba, Iran, and Sudan are prohibited, as are most imports from Burma or North Korea, into the United States or its outlying areas. Lists of entities and individuals subject to economic sanctions are included in OFAC’s List of Specially Designated Nationals and Blocked Persons at http://www.treas.gov/offices/enforcement/ofac/sdn. More information about these restrictions, as well as updates, is available in the OFAC’s regulations at 31 CFR Chapter V and/or on OFAC’s website at http://www.treas.gov/offices/enforcement/ofac.
Pursuant to the Sudan Accountability and Divestment Act of 2007, potential reinsurance companies must not conduct any restricted business operations in Sudan. For more information, refer to Pub. L. No. 11-174.
Pursuant to International Emergency Economic Powers Act (IEEPA), 50 U.S.C. §§ 1702-et seq., potential reinsurance companies must not engage in the following:
FEMA will not secure reinsurance from reinsurance companies that are inverted domestic corporation or a subsidiary of an inverted domestic corporation as defined in 6 U.S.C. § 395(b)-(c).
FEMA will not secure reinsurance from reinsurance companies that have unpaid U.S. Federal tax liability, for which all judicial and administrative remedies have been exhausted or have lapsed, and that is not being paid in a timely manner pursuant to an agreement with the authority responsible for collecting the tax liability.
FEMA will not secure reinsurance from a reinsurance company where the entity has been convicted of a felony criminal violation under any Federal law in the preceding twenty four (24) months.
- Office of Foreign Assets Control
- Prohibition on Conducting Restricted Business Operations in Sudan
- Prohibition on Engaging in Certain Activities or Transactions related to Iran
- Export any sensitive technology, as defined in the IEEPA, to the government of Iran or any entities or individuals owned or controlled by, or acting on behalf or at the direction of, the government of Iran;
- any activities for which sanctions may be imposed under section 5 of the Iran Sanctions Act. These sanctioned activities are in the areas of development of the petroleum resources of Iran, production of refined petroleum products in Iran, sale and provision of refined petroleum products to Iran, and contributing to Iran's ability to acquire or develop certain weapons or technologies; and
- any transaction that exceeds $3,500 with Iran’s Revolutionary Guard Corps or any of its officials, agents, or affiliates, the property and interests in property of which are blocked pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) Refer to OFAC’s Specially Designated Nationals and Blocked Persons List at http://www.treasury.gov/ofac/downloads/t11sdn.pdf .
- Prohibition on Inverted Domestic Corporations
- Delinquent Tax liability or a Felony Conviction under Federal Law
Trade Agreement Act of 1979 and WTO GPA Conditions
If more than the required number of reinsurers meeting the minimum requirements described in Section (j), subscribe to the FEMA’s Firm Order Terms, then FEMA may give preference to reinsurers with:
Reinsurance is a service covered by the WTO GPA.
- Pursuant to the Trade Agreements Act of 1979 (TAA), 19 U.S.C. § 2501) and the WTO GPA, FEMA will only secure reinsurance from reinsurance companies that meet the following criteria:
- The potential reinsurance company must be established in a country approved as TAA-eligible. A list of TAA designated countries may be found at http://gsa.federalschedules.com/resources/taa-designated-countries. This list may be amended from time to time or be superseded by international agreements or events. The country in which a potential reinsurance company is “established” means the country in which it is incorporated and maintains its principal place of business or headquarters.
- The potential reinsurance company must perform the following tasks for the performance under such reinsurance agreement entirely within a TAA-eligible country:
- underwriting, including any decisions and activities necessary to making the underwriting decision concerning the reinsurance (including for example, if applicable, modeling, pricing, quoting, and review of the terms and conditions of the Agreement);
- accept and execute the Agreement;
- accept payment of premiums from FEMA under the Agreement;
- administer the reinsurance agreement; and
- adjudicate and pay claims under the Agreement.
- Potential reinsurance companies will be evaluated on an ongoing basis during the term of such reinsurance agreement for their compliance with the conditions for participation under the standards set forth in the GPA and other TAA-Related Requirements.
- A potential reinsurance company may be disqualified and excluded from participation if any of the following occur at any time prior to or while an entity has responsibilities under such reinsurance agreement:
- false declarations;
- significant or persistent deficiencies in performance of any substantive requirement or obligation under a prior reinsurance-related contract or contracts;
- final judgments in respect of serious crimes or other serious offenses;
- professional misconduct or acts or omissions that adversely reflect on the commercial integrity of the entity;
- failure to pay taxes; or
- violation of or failure to comply with any TAA-related requirements or any other laws or regulations applicable either to such a reinsurance agreement or to the potential reinsurance company.
- Where, pursuant to Article IX, a procuring entity intends to select a limited number of qualified suppliers to be invited to tender, the criteria that will be used to select them and, where applicable, any limitation on the number of suppliers that will be permitted to tender.
- Strong financial metrics as measured by A.M. Best ratings, S&P ratings, Lloyd’s market ratings (as applicable), Policyholder Surplus and financial ratio tests;
- Strong investment and/or history in flood reinsurance;
- Expertise in reinsurance flood underwriting; and
- Consistency in price and capacity between quoting and final terms offered.
- An indication that the procurement is covered by this Agreement.