Building a Culture of Preparedness with Reinsurance

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After every disaster, no matter where or what size, there is a marked difference between insured disaster survivors and disaster survivors without adequate insurance. The insured survivor can begin to repair and rebuild their home or business. The survivor without a flood insurance policy may face a far more uncertain future. While FEMA or other government or non-profit agencies may provide some assistance, it is typically geared toward immediate survival needs. The uninsured survivor may use up their savings, incur debt, or even lose their home or business.

Simply put, flood insurance is the best way for homeowners, renters, and businesses to financially protect themselves from losses caused by floods. However, across the nation many homes remain underinsured. For example, during Hurricane Harvey, nearly half of all flood insurance claims in the Houston area came from homes outside of the high-risk flood area. Approximately 80 percent of households impacted by the storm did not have flood insurance. This is why the National Flood Insurance Program (NFIP) is laser focused on building a culture of preparedness across the nation.

 Reinsurance Backed by Capital Markets FEMA secured reinsurance that for the first time engages the capital markets, complemeting the NFIP’s existing traditional reinsurance coverage. Effective on August 1, 2018, FEMA entered into a three-year reinsurance agreement with reinsurance company, Hannover Re (Ireland) Designated Activity Company (DAC). Hannover Re acted as a “transformer,” transferring $500 million of the NFIP’s financial risk to capital markets investors by sponsoring the issuance of a catastrophe bond through a special purpose reinsurer. FEMA will pay $62 million in premium for the first year of coverage.

 

 

 

 

 

 

 

 

As part of our risk management strategy, earlier this year, we secured $1.46 billion in traditional reinsurance coverage from 28 companies to cover any qualifying NFIP flood losses that occur in 2018. Reinsurance provides payouts when powerful storms like Hurricane Harvey strike. This reduces FEMA’s need to borrow from the U.S. Treasury to pay flood insurance claims.

In theory, this business decision is similar to an individual taking the responsible step of purchasing homeowner’s and auto insurance to manage their financial risk. They do not plan to experience a fire or car accident, and they probably won’t, but purchasing insurance meaningfully improves their financial security.

To complement the NFIP’s existing reinsurance coverage, FEMA recently secured additional reinsurance through a transaction that, for the first time, engages the capital markets. FEMA obtained this reinsurance coverage from Hannover Re, which transferred $500 million in NFIP risk to capital markets investors.

Combined with the January 2018 traditional reinsurance placement, FEMA has transferred $1.96 billion of the NFIP’s flood risk for the 2018 hurricane season to the private sector. This additional coverage is effective on August 1, for a period of three years. FEMA will pay $62 million in premium for the first year of coverage.

Whether or not 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.

Ultimately, we are building a culture of preparedness. We are making all of our communities and nation more resilient. In securing reinsurance, FEMA is strengthening the NFIP’s financial framework so that the program can continue helping Americans take the critical step of securing flood insurance. Our ambitious goal is to double the number of properties covered by flood insurance by 2022. As Administrator Brock Long says: “Insurance is the first line of defense for disaster recovery.”


This article was originally published here

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