FEMA Expands Reinsurance Program, Transfers $575M in Flood Risk

The Federal Emergency Management Agency (FEMA) has announced the expansion of its reinsurance program, transferring $575 million in flood risk to capital markets. This move marks the seventh instance of FEMA obtaining reinsurance coverage through insurance-linked securities reinsurance.

Under 3-year reinsurance agreements with transformer reinsurer Hannover Re (Ireland) Designated Activity Company, FEMA has facilitated the transfer of the program's financial flood risk to qualified capital market investors via a special purpose insurer, FloodSmart Re Ltd, for sponsoring catastrophe bonds.

The agreements entail FEMA paying approximately $85.7 million in premiums for the first year of reinsurance coverage, excluding initial expenses. In the event of a single flood event, the agreements will cover losses as follows.

• 10 percent of losses between $8 billion and $9 billion
• 23.75 percent of losses between $9 billion and $11 billion

David Maurstad, FEMA's assistant administrator for the Federal Insurance Directorate and senior executive of the National Flood Insurance Program (NFIP), said, "This latest investment in our reinsurance program reinforces FEMA's objectives to expand financial tools to achieve a sound financial framework and bolster the programs' claims paying capacity following extreme flooding events."

This latest development builds on FEMA's NFIP reinsurance program initiated in 2018, with each placement spanning a 3-year term. Combined with existing reinsurance coverage and traditional placements, FEMA has successfully transferred $1.92 billion of the NFIP's flood risk to the private sector ahead of the 2024 hurricane season.

The authority for FEMA to secure reinsurance was granted by Congress through the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014.