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FEMA Seeking To Tap the Capital Markets for the NFIP

Investing Money Stocks
April 06, 2018

The Federal Emergency Management Agency (FEMA) is seeking to secure additional reinsurance for the National Flood Insurance Program (NFIP) through a mid-year placement engaging the capital markets. This will continue to expand the role of the private markets in managing the nation's flood risk.

"The NFIP requires a stronger financial framework built on expanding our portfolio of actuarially-priced policies. Transferring more of the risk burden to the private capital markets continues to be part of that strategy," said Roy Wright, director of the NFIP. "During the second largest loss year in the program's history, the reinsurance marketplace came through and supported the NFIP. We expanded the traditional reinsurance cover earlier this year. Now we will continue that risk transfer by tapping the capital markets."

Under the Biggert-Waters Flood Insurance Reform Act of 2012 and Homeowner Flood Insurance Affordability Act of 2014, Congress authorized FEMA to secure reinsurance from the private reinsurance and capital markets to strengthen the financial framework of the NFIP.

FEMA first purchased reinsurance in 2017 and recovered $1.042 billion from the private markets due to losses from Hurricane Harvey. In early January 2018, FEMA secured $1.46 billion in reinsurance from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event occurring in calendar year 2018.

FEMA plans to transfer additional risk by engaging the capital markets for the first time through an insurance-linked securities (ILS) transaction on or around July 1, 2018. FEMA said this new "building block" will enable it to transfer risk through two avenues—the traditional reinsurance markets and the capital markets—using tools such as ILS. Engaging both markets will create more competition and reduce the NFIP's risk transfer costs. It will also enable FEMA to access greater market capacity and spread its risk across a more diverse pool of companies and investors.

FEMA has published a public notice of its intent to pursue the mid-year ILS transaction. It advises potential reinsurer partners to contact FEMA (via email addresses provided in the notice) by April 6, 2018, to indicate interest in participating and receive additional information. However, FEMA cannot guarantee that it will complete such an ILS transaction in 2018. FEMA will complete any placement only if it is beneficial to the NFIP.

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