The Federal Emergency Management Agency (FEMA) is expanding its reinsurance program by engaging reinsurance markets. This will strengthen the financial framework of the National Flood Insurance Program and promote private sector participation in flood risk management.
In early March 2024, FEMA secured reinsurance coverage through insurance-linked securities reinsurance. Three-year reinsurance agreements were signed with Hannover Re (Ireland) Designated Activity Company, the current transformer reinsurer. The transaction saw Hannover transfer $575 million of the program’s financial flood risk to qualified capital market investors.
For the first year of reinsurance coverage, FEMA will pay about 85.7 million in premiums. The agreements will also cover the following losses for any single flood event:
- 10% of losses between $8 billion and $9 billion
- 23.75% of losses between $9 billion and $11 billion
David Maurstad, FEMA’s Assistant Administrator for the Federal Insurance Directorate and senior executive of the National Flood Insurance Program, is pleased with the program. He pointed to the favorable terms and the ability to retain the current level of reinsurance at acceptable rates. Additionally, he said that this latest investment will allow FEMA to bolster the programs’ claims process in the aftermath of extreme flooding events.
FEMA received authorization to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012, and the Homeowner Flood Insurance Affordability Act of 2014. For more information about the National Flood Insurance Program (NFIP) Reinsurance Program, visit this link.
Reinsurance and the National Flood Insurance Program
In simple terms, reinsurance is insurance for insurance companies. The NFIP pays premiums to reinsurers, who in turn provide coverage for losses incurred by the NFIP.
FEMA uses two reinsurance strategies:
- Traditional reinsurance for a one-year term
- Insurance-linked securities reinsurance for 3-year catastrophe bonds
These strategies will allow FEMA and the NFIP to protect against future flood losses.
Image: Craig Whitehead via Unsplash
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