FEMA Expands Reinsurance Program by Transferring $575M in Flood Risk to Capital Markets

The Federal Emergency Management Agency in an effort to engage reinsurance markets to bolster the financial framework of the National Flood Insurance Program and promote private sector participation in flood-risk management has again obtained reinsurance coverage through insurance-linked securities reinsurance.

FEMA entered into three-year reinsurance agreements with its transformer reinsurer, Hannover Re (Ireland) Designated Activity Company. In turn, Hannover, transferred $575 million of the program’s financial flood risk to qualified capital market investors through a special purpose insurer, FloodSmart Re Ltd, for sponsoring catastrophe bonds.

As part of the agreements, FEMA will pay $85.7 million in premiums, excluding initial expenses, for the first year of reinsurance coverage.

The agreements will cover the following losses for any single flood event:

• 10% of losses between $8 billion and $9 billion
• 75% of losses between $9 billion and $11 billion

The coverage builds on FEMA’s NFIP Reinsurance Program transferring the program’s flood risk to qualified capital market investors since 2018.

Each placement is a three-year term:

• $275 million in March 2023
• $450 million in February 2022

FEMA has transferred $1.92 billion of the NFIP’s flood risk to the private sector ahead of the 2024 hurricane season. Congress authorized FEMA to secure reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012, and the Homeowner Flood Insurance Affordability Act of 2014.