November 30, 2017
Office of External Affairs
Private Sector Division
Frequently Asked Questions
National Flood Insurance Program Reinsurance Program
Q: What is reinsurance?
A: 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 pay premiums to reinsurers. In exchange, reinsurers provide coverage for losses incurred by insurance providers up to a specified amount that is 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) secured “catastrophe property excess of loss” reinsurance. Similar to a homeowner’s insurance policy, 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.
Private insurance companies around the world commonly use reinsurance as a tool to manage risk. Public entities also secure reinsurance. Several U.S states have reinsurance programs, including Florida (the Citizens Property Insurance Corporation of Florida), California (the California Earthquake Authority), and Texas (the Texas Windstorm Insurance Association).
Q: What is FEMA’s National Flood Insurance Program (NFIP) Reinsurance Program?
A: The National Flood Insurance Program (NFIP) Reinsurance Program helps FEMA manage the future exposure of the NFIP through the transfer of risk to private reinsurers. With the impacts of several large flood disasters over the past years, the NFIP experienced situations where the cost of policy claims far exceeded the amount of premiums and accumulated surplus. This resulted in the NFIP incurring debt to the U.S. Treasury.
Through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA), FEMA received the authority to secure reinsurance from the private reinsurance and capital markets. In response, FEMA created the NFIP Reinsurance Program to be financially prepared for potential losses from significant flooding events similar to Hurricanes Harvey, Katrina and Sandy.
In 2017, the NFIP Reinsurance Program:
- Diversified the tools FEMA uses to manage the financial consequences of major flood risk by obtaining reinsurance in January 2017;
- Laid the cornerstone for a multi-year program;
- Extended the NFIP’s claims-paying ability to avoid adverse outcomes by securing reinsurance at a fair and reasonable cost; and
- Promoted private sector participation in flood-risk management.
Q: What did FEMA buy in 2017?
A: In 2017, FEMA entered into agreements with 25 reinsurers to transfer up to $1.042 billion in flood risk. The reinsurance premium was $150 million, spanning from January 1, 2017 through January 1, 2018. Under this agreement, the reinsurers will cover 26 percent of losses between $4 billion and $8 billion arising from Hurricane Harvey.
The 2017 placement was a key step towards achieving the NFIP’s long-term vision of building a stronger financial framework. It placed the NFIP in a better position to manage losses incurred from major flood events by transferring exposure to reinsurers.
Q: How does securing reinsurance affect the current National Flood Insurance Program’s debt?
A: One of the reasons FEMA secured reinsurance in 2017 was to increase the NFIP’s flood claims-paying ability by protecting itself against a portion of its potential losses. Securing reinsurance does not reduce the size of NFIP’s current Treasury debt; rather, it is intended to reduce the accumulation of future debt.
Q: Does the placement of reinsurance affect policyholders?
A: With the placement of reinsurance, the NFIP retains its ability to pay out claims to policyholders quickly and fully, and it is less likely to need Congressional action to increase its borrowing authority.
The 2017 reinsurance agreement is between FEMA and reinsurers, and does not impact the NFIP’s policy with its policyholders.
Reinsurance has a cost, but the January 2017 reinsurance placement did not result in an increase to flood insurance policyholders’ rates. As the Program expands in the future, FEMA will work with the Administration and Congress to determine how to cover the costs of a larger NFIP Reinsurance Program.
Q: What is FEMA’s multi-year reinsurance strategy?
A: In January 2017, FEMA made a cornerstone placement of reinsurance to establish a multi-year NFIP Reinsurance Program.
Next steps include solidifying the NFIP Reinsurance Program and preparing for future engagements with the reinsurance markets in January 2018.
In practice, this looks like:
- Upgrading the Reinsurance Program’s vision, strategy and operations based on 2017 lessons learned to optimize a multi-year strategy.
- Expanding the NFIP’s flood modeling capabilities.
- Engaging industry partners to incorporate best practices from the private sector.
The multi-year Reinsurance Program strategy is:
- Financial Strength: To strengthen the NFIP’s financial standing by sharing financial risk with private industry at a price that is fair to the Federal Government.
- Level of Risk: To manage claims exposure by lessening the need to incur additional Treasury debt.
- Customer Experience: To foster strong trust-based relationships with policyholders based on delivering consistently outstanding support during and after major floods.
- Stability: To stabilize NFIP’s annual expenditures in order to operate within a predictable and defensible annual budget.
- Efficiency: To institutionalize effective program and financial management discipline to ensure informed, data-based decision making.
- Transparency: To enhance the credibility of the NFIP with federal and congressional decision-makers and private sector thought leaders through the bilateral learning and sharing of detailed risk information with them and the private market.
Q: Will FEMA recover under the 2017 Reinsurance Agreement as a result of the 2017 hurricane season?
A:Yes, Hurricane Harvey has triggered FEMA’s 2017 reinsurance placement. As Harvey claims develop, FEMA is working with the 25 reinsurers to collect against the $1.042 billion in NFIP flood risk that was transferred earlier this year. FEMA does not expect that losses associated with Hurricanes Irma and Maria will materially affect reinsurers under the 2017 Reinsurance Agreement.
Q: How much money will FEMA receive from reinsurers under the 2017 Reinsurance Agreement as a result of the 2017 hurricane season?
A:FEMA is working diligently to understand the full extent of losses to the NFIP in 2017. At this time, loss estimates range between $8.5 billion and $9.5 billion, which would mean that FEMA will recover the entire $1.042 billion in reinsurance.
Q: Will the timing of reinsurance payments under the 2017 Reinsurance Agreement affect policyholders receiving claim payments from FEMA?
A:No, FEMA is committed to paying claims to policyholders quickly and fully. The timing of reinsurance payments to FEMA under the 2017 Reinsurance Agreement does not impact claims payments to insured flood survivors.
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