The Federal Emergency Management Agency is turning to the likes of Swiss Re and Munich Re for its first reinsurance program to help manage catastrophic costs from its debt-ridden National Flood Insurance Program.
Plans call for running the reinsurance initiative through the Federal Emergency Management Agency, thanks to legislation passed in 2012 and 2014 that gives it authority to obtain reinsurance from both the reinsurance and capital markets.
Reinsurance agreements are already in place with Transatlantic Reinsurance Company, Swiss Re America and Munich Re America, effective Sept. 19, 2016 through March 19, 2017. On top of that FEMA contracted Guy Carpenter and Company to help broker any reinsurance agreements needed down the line.
In the hopes of launching a reinsurance program in early 2017, what is known as the NFIP Reinsurance Initiative Team will acquire $1 million in reinsurance, a move that will help it prepare for a larger purchase in early 2017. The Team will pursue “measured steps to identify and resolve any barriers or issues in advance of the implementation,” FEMA said in its announcement.
Why does the NFIP need reinsurance? It comes down to a matter of debt, and the reinsurance initiative is designed to give the NFIP more options to better handle financial costs stemming from catastrophic flood risk. The NFIP is about $23 billion in the red with the U.S. Treasury, due to large flood disasters in 2005, 2008 and 2012. FEMA said that these floods have led to the cost of claims far exceeding the amount of premiums and accumulated surplus.
Frank Nutter, president of the Reinsurance Association of America, said that the new NFIP reinsurance program address an issue it has long lobbied for – a private reinsurance market for flood.
“I commend the Administration and FEMA for creating the NFIP reinsurance program and the financial protections it will afford taxpayers,” Nutter said in prepared remarks.
Munich Re, meanwhile, also issued a statement about the FEMA reinsurance program news.
Tim Brockett, strategic product manager for Munich Re, U.S., noted in prepared remarks that the reinsurer is already active in the private flood market, with a personal lines Inland Flood Insurance Policy Endorsement in play since 2015.
“We are interested in seeing that more US citizens get coverage for flood events. However, there are challenges/obstacles to be overcome before the private insurance market is ready to fully take on flood risk,” Brockett said. “A gradual transition will be necessary, and for that to take place, the NFIP needs to be fortified in the short-term against spike year events such as Hurricane Katrina and Superstorm Sandy.”
The NFIP is up for reauthorization, and many in the industry want to see renewal include an expanded private market that would work alongside the federal option.