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Legislative proposals to reform the National Flood Insurance Program explicitly support the use of risk transfer tools, which private-market stakeholders say is critical to expanding their participation in covering flood risk and ensuring there is not a repeat of 2005, when losses related to several major hurricanes helped put the program in debt to the tune of $24.6 billion.
The Federal Emergency Management 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.
Under the agreement, the reinsurers indemnify FEMA for flood claims on an occurrence basis. The layer is structured to cover 26% of losses between $4 billion and $8 billion. A combined total of $1 billion of the NFIP’s flood risk was transferred to the private reinsurance market through this agreement. The reinsurance brokerage is already in discussions with FEMA and preparing for a renewed placement effective Jan. 1 that could involve additional reinsurers.
The risk transfer section of the Senate Banking Committee’s proposal would clarify that the FEMA administrator may use risk transfer tools other than traditional reinsurance, including catastrophe bonds, collateralized reinsurance, resilience bonds and other insurance-linked securities.
“If they want to truly get a robust reinsurance program in place, they are going to have to access all forms of capital that can support reinsurance transactions,” said Jake Clark, New York-based managing director and leader of Guy Carpenter’s public-sector practice in North America.
Munich Reinsurance America Inc. participated in the current agreement and sees opportunity for expanding the reinsurance program.
“The more data that the NFIP can share with reinsurers, the more interest they’ll get from the market, and certainly the more transparent they can be, the better,” said Tim Brockett, senior vice president and manager of strategic products within Munich Re’s reinsurance division in Princeton, New Jersey.
“In terms of expanding that program, there are options there,” he said. “Right now, it attaches at a pretty high attachment point and it really is going to pick up tail events, larger events. The NFIP probably could use something that addresses some of the frequency issues that they’ve had. Reinsurance can be a method to help do that. For that to happen, reinsurers are going to have to get more comfortable with flood models, and flood models are going to have to come further along in terms of the ability to provide a probabilistic flood estimate. But the fact that something was placed Jan. 1 and that there was a lot of interest in the marketplace, the importance of that can’t be overstated. It was a great start.”
It is still a buyer’s market for excess and surplus lines, with significant capacity and continuing rate declines — although there have been rate hikes in select lines — say experts, who generally predict the overall soft market will continue for the foreseeable future.