The flooding program under FEMA is working to transfer a huge amount of its risk to the private sector.
The Federal Emergency Management Agency has now purchased reinsurance from private companies for its National Flood Insurance Program. The agreements officially became effective on September 19, 2016 and will continue coverage through March 19, 2017. That said, they have indicated intentions to purchase more coverage next year.
The coverage has been purchased through Swiss Re America Corp., Transatlantic Reinsurance Co., and Munich Reinsurance America Inc.
To reinsure the National Flood Insurance Program, FEMA entered into a contract with a Marsh & McLennan subsidiary, Guy Carpenter and Co. That firm provided brokerage assistance in obtaining the reinsurance agreements.
Within the agreements that have been purchased, there are two different levels of catastrophe property excess of loss coverage. The first is that the reinsurance companies involved have agreed that FEMA will be indemnified of $1,000,000 for flood loss claims over $5,000,000. The second has the reinsurers agreeing to FEMA’s indemnification for $1,000,000 in flood loss claims when there is a total single event loss greater than $5,500,000,000.
Each of the participating reinsurers covers the National Flood Insurance Program for 33.3 percent.
This reinsurance coverage is a direct step for FEMA to transfer the risk associated with NFIP. That said, it has acknowledged that the first coverage amount for transferring this risk is “small in comparison to the losses incurred from recent catastrophic events.”
At the moment, the program already owes $23 billion to the Treasury. Hurricane Katrina was a breaking point for NFIP, as claims cost the program $16.3 billion. It was slowly creeping its way out of debt when Hurricane Sandy piled on another $8.3 billion in claims.
For the National Flood Insurance Program starting in early January of next year, FEMA continues to crunch numbers to decide how much risk transfer it should purchase. What is already known is that the reinsurance it will buy will be greater than the starting amount of $1 million that it has already purchased.
On its website, the agency released a statement saying “While the early January program will reduce NFIP’s overall risk, the NFIP will continue to bear the majority of its risk. It will take many years to build up a reinsurance program in which the reinsurance markets bear a significant portion of the NFIP risk.”