The U.S. Federal Emergency Management Agency (FEMA) has begun the process of collecting on its 2017 reinsurance program, after claims from hurricane Harvey's flooding after surpassing its retention due to the impact of the storm and anticipates recovering the full $1.024 billion from its 25 reinsurers.
FEMA placed a January 2017 NFIP flood reinsurance program that provided it with $1.024 billion of coverage, supplied by a panel of 25 reinsurers.
Claims from hurricane Harvey surpassed the $4 billion attachment point for the reinsurance layer on November 6th, according to FEMA Deputy Associate Administrator for Insurance and Mitigation Roy Wright, and this week, the collections from the reinsurance panel begin.
"The private reinsurance markets will help Hurricane Harvey survivors by sharing a portion of the costs of flood insurance claims," Wright explained.
"Catastrophic events like Hurricanes Harvey, Irma, and Maria will continue to occur, and the costs associated with extreme events exceed what the NFIP can manage alone. The unprecedented 2017 hurricane season has demonstrated that reinsurance is an important tool in sharing risk with the private sector," he continued.
FEMA approaches the reinsurance market with the ideal that buying protection at a "fair and reasonable cost" helps it to extend its claims-paying ability. The example of hurricane Harvey has clearly shown that private risk markets can help to lessen the burden on the U.S. taxpayer, helping FEMA to reduce the accumulation of future debt.
The $1.024 billion of 2017 excess of loss reinsurance coverage protects FEMA for 26% of the NFIP's losses across a layer from $4 billion to $8 billion.
FEMA is now working with the 25 reinsurance counterparties to collect on the coverage, and at this time, the latest loss estimates suggest the final Harvey bill for the NFIP will be between $8.5 billion and $9.5 billion, meaning FEMA would recover the entire $1.042 billion.
The 25 reinsurers now facing a share of this loss are: Axis Reinsurance Company U.S., Everest Reinsurance Company, General Reinsurance Company, Hannover Ruck SE, Liberty Mutual Insurance Company, Lloyd's Syndicate 2001 Amlin, Lloyd's Syndicate 1414 Ascot, Lloyd's Syndicate 2987 Brit, Lloyd's Syndicate 435 Faraday, Lloyd's Syndicate 033 Hiscox, Lloyd's Syndicate 4472 Liberty Specialty Markets, Lloyd's Syndicate 1458 RenaissanceRe, Lloyd's Syndicate 4444 Sompo Canopius, Lloyd's Syndicate 2003 XL Catlin, Market Global Reinsurance Company, Munich Reinsurance America Inc., National Indemnity (U.S.), Partner Reinsurance Company of the U.S., QBE Reinsurance Corporation, Renaissance Reinsurance U.S. Inc., SCOR Reinsurance Company, Swiss Reinsurance America Corporation, Transatlantic Reinsurance Company, Validus Reinsurance (Switzerland) Ltd., and XL Reinsurance America Inc.
FEMA is now in the market for a 2018 flood reinsurance program renewal, seeking to place its first multi-year program and likely to grow the size of the coverage as well.
The 2017 placement did not result in any additional cost to NFIP policyholders and FEMA said that as it looks to expand the use of reinsurance it will "work with the Administration and Congress to determine how to cover the costs of a larger NFIP Reinsurance Program."
The NFIP still faces challenges though, as it is only currently authorised through December 8th. There are suggestions it may only receive a short reauthorisation, but FEMA is confident that it will be reauthorised and extended and that some of the proposed reforms will also be adopted.
Wright explained, "As we continue to build out our multi-year reinsurance strategy with a January 2018 reinsurance placement, we look forward to incorporating reauthorization reforms that build a stronger NFIP for tomorrow."
There are still efforts going through the U.S. legislative process that include calls for much greater use of flood reinsurance, including tapping the capital markets for flood catastrophe bonds and utilising the support of ILS markets for collateralized coverage.
So FEMA looks set to recognise the full benefits of its first reinsurance program this year and will likely place a larger program for 2018, as lawmakers recognise the benefits of offloading risk to private markets to lower the requirement to raise more debt to support the NFIP.
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