National Flood Insurance Program’s Reinsurance Program

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Multi-Year Reinsurance Strategy

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The National Flood Insurance Program (NFIP) Reinsurance Program helps FEMA manage the future exposure of the NFIP through the transfer of risk to private reinsurance companies and capital market investors. The NFIP Reinsurance Program promotes private sector participation in flood-risk management. By securing reinsurance at a fair and reasonable cost, FEMA has an additional method to fund payment of flood claims after catastrophic flood events.

Congress granted FEMA 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).

How Reinsurance Works

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, such as the National Flood Insurance Program, pay premiums to reinsurers. In exchange, reinsurers provide coverage for losses incurred by insurance providers up to a specified amount 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) secures “property catastrophe per occurrence excess of loss” reinsurance. 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.

FEMA has two reinsurance strategies that it is currently participating in to include traditional reinsurance for one-year each and capital markets reinsurance for three years each. FEMA remains committed to growing the NFIP Reinsurance Program and continues to explore additional ways to protect against future flood losses.

Private insurance companies around the world commonly use reinsurance as a tool to manage risk. Public entities also secure reinsurance. Several U.S. states operate insurance providers that utilize reinsurance, including the Citizens Property Insurance Corporation of Florida, the California Earthquake Authority, and the Texas Windstorm Insurance Association.

Overview of FEMA’s Multi-Year Reinsurance Strategy

Traditional Reinsurance

Capital Market Reinsurance

The January 2017 traditional reinsurance placement marked a key step towards achieving a stronger and more resilient National Flood Insurance Program. The traditional reinsurance placement is for one-year beginning on Jan. 1-Dec. 31. With the current public notice for the Jan. 2021 placement, this will be the National Flood Insurance Program’s fifth traditional placement.

These traditional reinsurance placements are a key step towards achieving the National Flood Insurance Program’s long-term vision of building a stronger financial framework and places the program in a better position to manage losses incurred from major flood events by transferring exposure to reinsurers.

All insurance proceeds recovered under the NFIP reinsurance agreements will be deposited into the National Flood Insurance Fund.

Public Notice for Traditional Reinsurance Placement by Year

All records represent the calendar year from Jan. 1 - Dec. 31.

2021

2020

2019

2018

2017

Summary of Traditional Reinsurance Placements

Year	Amt of Risk Transferred	Number of Reinsurers	FEMA Premium Paid
2021	$1.153 billion	32	$195.8 million
2020	$1.33 billion	27	$205 million
2019	$1.32 billion	28	$186 million
2018	$1.46 billion	28	$235 million
2017	$1.042 billion	25	$150 million

The August 2018 capital market placement marked the next step of a multi-year strategy and continues to promote private sector participation in flood-risk management. The initial placement is significant because, for the first time, capital markets investors are directly backing NFIP reinsurance coverage.

In addition, FEMA transferred flood risk to the capital markets with two additional multi-year reinsurance agreements in April 2019 and February 2020.  By engaging both the traditional reinsurance markets and the capital markets, the NFIP can reduce risk transfer costs, access greater market capacity, and further diversify its risk transfer partners.

FEMA used a transformer/fronting reinsurance company (Hannover Re Ireland) for these three placements.

The capital market reinsurance placements cover the 50 U.S. states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The National Flood Insurance Program has few policies in additional U.S. territories and will have no issues paying flood claims in those territories. As a result, American Samoa, Guam and Northern Mariana Islands are not included in the geographic scope of these placements.

Types of Flood Events and Geographic Areas Covered by the Three Capital Markets Reinsurance Placements

These capital market reinsurance placements only covers risk from “named storms.” A named storm is a storm or storm system that the National Weather Service’s National Hurricane Center has declared to be a tropical cyclone, tropical depression, tropical storm, or hurricane. These reinsurance placements apply to flooding resulting directly or indirectly from a named storm.

There is an exception: A major flood event that is not a named storm would not trigger the FloodSmart 2018-1, FloodSmart 2019-1 and FloodSmart 2020-1 placements. Catastrophe modeling and historical experience indicate that the vast majority of the NFIP’s risk of single flood events causing losses greater than $4.414 million (the level at which the August 2018 placement reset would trigger) stem from named storms.

Public Notice for Capital Market Reinsurance Placement by Year

Feb. 20, 2020 - Feb. 19, 2023

April 17, 2019 - April 16, 2022

Aug. 1, 2018 - July 31, 2021

Summary of the Capital Market Reinsurance Placements

Year	Duration (3 years)	Premium Paid for the first year	Coverage losses
2020	Feb. 20, 2020 - Feb. 19 2023	$50.28 million	3.33% of losses between $6 and $9 billion 30% of losses between $9 and $10 billion
2019	April 17, 2019 - April 16, 2022	$32 million	2.5% of losses between $6 and $8 billion 12.5% of losses between $8 and $10 billion
2018	Aug. 1, 2018 - July 31, 2021	$62 million	3.5% of losses between $5 and $10 billion 13% of losses between $7.5 and $10 billion

NFIP’s Reinsurance Placements Do Not Affect Policyholders

Reinsurance agreements are between FEMA and reinsurers, and do not impact the NFIP’s contracts with its policyholders. Rather, reinsurance provides the NFIP an additional method to fund payment of flood claims to policyholders and decreases the likelihood that the NFIP will need congressional action to increase its borrowing authority with the U.S. Treasury.

Reinsurance has a cost, but the four traditional reinsurance placements in January 2017-2020 and three capital market placements between August 2018 - February 2020 did not result in an increased rate for NFIP policyholders. As the NFIP Reinsurance Program expands, FEMA will work with the Administration and Congress to determine how to cover the costs of a larger program.

Timing of Reinsurance Payments Has No Effect on Claim Payouts

FEMA is committed to paying claims to policyholders quickly and fully. The timing of reinsurance payments to FEMA under any reinsurance agreement does not impact claims payments to insured flood survivors.

Securing Reinsurance Does Not Impact the NFIP’s Current Debt

FEMA secured reinsurance in 2017-2020 to protect itself against a portion of its potential flood claim liability and provide an additional method to fund payment of flood claims after a catastrophic event. Securing reinsurance does not reduce the size of NFIP’s current debt to the U.S. Treasury; rather, it is intended to reduce the accumulation of future debt.

Why FEMA Didn’t Recover Any Reinsurance as a Result of the 2019 Hurricane Season

Whether a catastrophic flood event happens in a given year, purchasing reinsurance transfers NFIP risk to the private sector, improving long-term financial outcomes for FEMA, the U.S. Treasury and federal taxpayers. During the 2019 hurricane season no qualifying events occurred under either of FEMA’s existing reinsurance agreements.