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The 50th anniversary of the Federal Emergency Management Agency’s National Flood Insurance Program on Wednesday is also the effective date for the NFIP’s first-ever catastrophe bond.
“We recognize the 50th anniversary of the day Congress passed the National Flood Insurance Act,” David Maurstad, chief executive of the National Flood Insurance Program, said on a conference call Wednesday. “Relative to the future of the program, August 1 is even more significant now that we have our first-ever catastrophe bond placement that goes into effect today.”
On Tuesday, FEMA announced the placement of a $500 million catastrophe bond to help cover flood losses for three years, FloodSmart Re $500 million Series 2018-1 Notes.
Reinsurance is a core part of the agency’s approach to managing exposures, Mr. Maurstad said on the call.
“Securing reinsurance is a key step towards achieving the NFIP’s long-term vision of building a strong financial framework and places the NFIP in a better position to manage losses incurred from major flood events by transferring exposure to reinsurance and now to the capital markets,” Mr. Maurstad said.
The placement is significant, he added, because for the first time capital market investors are directly backing NFIP reinsurance coverage.
FloodSmart Re will be the first catastrophe bond to solely provide reinsurance coverage for flood risks, which is a first for the cat bond market, A.M. Best Co. Inc. noted in a Wednesday report, NFIP Extended but Private Markets May Provide Long-Term Flood Relief.
“The new arrangement diversifies FEMA’s growing reinsurance arrangements for the NFIP’s book of business,” Best said, adding that “reception from the capital market was so favorable that the initial $275 million offering was upsized to $500 million.”
The NFIP also said it will continue to look at capital markets in the future, adding there are no specific plans as of now.
“Clearly, we’re in this for the long haul and will explore both traditional reinsurance and capital markets going forward,” Mr. Maurstad said.
The head of the flood insurance program also took the opportunity to renew his call for debt relief for the NFIP.
“It’s our belief that the program could function better, and the canceling of the debt would be a piece or a part of the development of a sound financial framework,” Mr. Maurstad said.
“While there is agreement that the NFIP needs long-term solutions, there is no consensus on what those solutions should be,” Best said. “Treasury is exploring various alternatives, including better resilience and prevention mechanisms and innovative ways to involve the private insurance and capital markets, such as partnerships with reinsurers, insurers, and the issuance of insurance linked securities.”
The National Flood Insurance Program is in debt to the tune of $24.6 billion — a problem that only the U.S. Congress can solve, stakeholders say.