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Reinsurers expected to sign on to NFIP pact despite 2017 claim

Posted On: Dec. 12, 2017 7:31 AM CST

The Federal Emergency Management Agency’s tapping of a $1 billion reinsurance agreement to pay Hurricane Harvey claims is unlikely to discourage most reinsurers from participating in the next reinsurance arrangement, although some may decide the risk is greater than the reward, experts say.

But stakeholders are increasingly concerned about the lack of additional progress on a long-term reauthorization and overhaul of the National Flood Insurance Program. The U.S. House of Representatives passed a substantive overhaul and reauthorization package on Nov. 14, but the Senate has yet to act on the measure or its own version.

“We were excited to see the House move earlier in November,” said Laura Lightbody, director of the flood-prepared communities’ initiative of the Pew Charitable Trusts in Washington. “Even before Hurricane Harvey, they’ve been pretty seriously looking at this issue … although there were some shortfalls in that bill, specifically as it relates to mitigation. We’ve called on the Senate to make sure mitigation is a key part of whatever they do introduce.”

Congress extended the NFIP, which was set to expire on Dec. 8, until Dec. 22, but it is unclear if that is enough time to work out an agreement given the tax reform bill and other major items legislators have to contend with before the holidays.

“It’s just another kick of the can down the road, and not much of a kick,” said Tom Dawson, a New York-based partner and co-chair of the insurance regulatory and transactional team at Drinker Biddle & Reath L.L.P. “It doesn’t look like there’s a whole lot of agreement on what the package should look. Whether it’s with respect to increasing involvement of the private sector in flood insurance, we still have that Democrat versus Republican divide, among other things.”

“Anybody from a coastal state and this is bipartisan … there’s a real resistance to anything remotely resembling actuarial-based pricing for flood insurance,” he added.

Stakeholders generally expect another short-term extension, but there is the possibility the program could be allowed to expire.

“It’s a very unlikely scenario that (expiration) happens,” Ms. Lightbody said. “I don’t think there’s appetite in Congress to let the program lapse. Essentially, if the program stops, there’s an impact on the real estate industry, there’s an impact on sales, on lending. It can be very disruptive, but I don’t anticipate that to be a real reality.”

In November, FEMA launched a procurement process to secure reinsurance for the NFIP, effective on or about Jan. 1, 2018. The agency piloted a reinsurance program for 2016 and secured a new placement effective Jan. 1, 2017, through Jan. 1, 2018, through a consortium of 25 reinsurers arranged through Guy Carpenter & Co. L.L.C., for which FEMA paid a total premium of $150 million.

“I think this it is what FEMA should be doing in terms of continuing to purchase reinsurance,” Mr. Dawson said. “It’s a sensible thing to do: take some of the risk off the table and share it with the world’s reinsurers.”

The agency submitted a $1.042 billion full-limit claim to the reinsurers for Hurricane Harvey losses on Dec. 5.

“Reinsurers are in the business of paying claims,” said Dennis Burke, vice president of the Reinsurance Association of America in Washington. “We willingly assume risk from insurers and the NFIP, so the fact that there was a loss is part of the business we’re in. There continues to be substantial appetite in the reinsurance market to write flood and other natural catastrophe perils.”

Mr. Dawson said he does not see the $1 billion claim materially discouraging reinsurers from participating in the next reinsurance placement, although it may impact some of the reinsurers at the margins.

“There are a lot of reinsurers that are looking for new classes of businesses,” Mr. Dawson said. “In terms of flood insurance and this particular relationship with the NFIP, to hang it up after one year because maybe there’s a dispute or an issue would be really short-sighted.”

“Reinsurers look at data and they look at risk management, and it was an anomaly this year because they had these three storms that happened within eight weeks,” said Alan Rubin, a principal with law firm Blank Rome L.L.P. in New York. “A number of reinsurers will step away. Some will be willing to take the risk, but I think they will shorten the term … so they can make an analysis every year, so they can determine whether the risk is worth the reward.”

The NFIP is in debt to the tune of about $25 billion, even with Congress forgiving $16 billion, due to the impact of the storms of 2017.

“Now you have a whole host of new claims from Irma, Harvey and Maria,” Mr. Rubin said. “If they don’t do something on a more permanent basis, they’re just going to continue to happen. Unfortunately … people just forget what the situation was. But you can’t simply do that any longer if you’re going to address storm surge and flood.”