FEMA Launches FloodSmart Re CAT Bond for NFIP Flood Risk

Reinsurance Association of America (RAA) and Artemis reports reveal that the Federal Emergency Management Agency (FEMA) has taken another significant step to utilize the private market to manage the financial burden of the National Flood Insurance Program's (NFIP's) catastrophic flood risk.

FEMA will launch a cat bond to transfer risk from the NFIP to the capital markets through FloodSmart Re, Ltd., a Bermuda-domiciled special purpose vehicle.

Frank Nutter, president of the RAA, said, "The RAA has long advocated for the NFIP to utilize the private market to provide financial backing for the government's flood risk. Along with its second successful placement of reinsurance coverage earlier this year, the cat bond issuance confirms FEMA's continued commitment to expanding private sector backing and the financial protections it will afford the NFIP and American taxpayers."

Commenting further on the upside of FEMA's utilization of the private market, Mr. Nutter noted that "FEMA recovered the full $1.042 billion of reinsurance coverage it placed with the private reinsurance sector in January 2017."

Artemis reported in a July 16, 2018, story, titled "FEMA's first NFIP flood cat bond launches, a $275m FloodSmart Re 2018," that FEMA seeks reinsurance protection from capital markets and insurance-linked securities investors for a minimum of $275 million. The reinsurance will solely cover flood events from US named storms.

Artemis said, "[T]wo cat bond tranches will sit partially alongside the $1.46 billion of private reinsurance that FEMA purchased at January 1st 2018, but will also extend further up into the tower as well, taking a share of losses within a layer that attaches at $5 billion of NFIP losses and extends up to $10 billion."