Prior to hurricane Ian’s landfall in Florida, the U.S. Federal Emergency Management Agency (FEMA) had already started the process of renewing the National Flood Insurance Program’s (NFIP) traditional reinsurance protection for the January 2023 renewals, a process which now looks set to be even more challenging.
The severe and widespread flooding from hurricane Ian is expected to result in NFIP losses, although it remains unclear exactly how high the claims burden will be.
FEMA announced in early September, so before Ian struck Cuba, Florida, and then the Carolinas, that it had begun the process of procuring reinsurance for the NFIP to be effective on or about January 1st, 2023.
With some reinsurers already looking to cut their catastrophe exposure and others exiting the space altogether, notably in places like Florida which experience other, unique challenges such as fraud and elevated litigation, as well as rising loss costs, it was expected to be a difficult and potentially more costly renewal for buyers of protection.
The impacts of hurricane Ian has only exacerbated the situation, and with losses continuing to develop and claims still being filed from the storm, FEMA looks set to experience a particularly difficult renewals while the NFIP is managing claims and the impacts on its policyholders.
Back in January, FEMA secured $1.064 billion of flood protection for a total premium of $171.9 million, structured to cover portions of NFIP losses above $4 billion arising from a single flood event.
This renewal came in slightly lower than the previous year, when FEMA procured $1.153 billion of flood reinsurance for the NFIP at a cost of $195.8 million.
The 2020 renewal was larger than both the 2022 and 2021 renewal, at $1.33 billion for a total premium of $205 million, and was roughly in line with the $1.32 billion secured for 2019, although that year’s tower came at a lower cost of $186 million.
For 2018, FEMA secured $1.46 billion of reinsurance protection for the NFIP, which was the entity’s second full placement after the 2017 renewal, which was sized at $1.042 billion.
As well as its traditional reinsurance, FEMA also has its FloodSmart Re catastrophe bond transactions, which offer additional protection from the capital markets for the NFIP.
The most recent of these, the $450 million FloodSmart Re Ltd. (Series 2022-1) was issued in February of this year, taking the amount of in-force protection from these bonds to $1.425 billion.
For 2023, FEMA states that it intends to procure reinsurance for flood risk in the U.S. insured by the NFIP, with Guy Carpenter serving as the firm’s reinsurance broker for the placement.
The hardening market environment meant that it was already expected to be a fairly challenging renewals for many buyers of protection, but Ian’s two U.S. landfalls are expected to drive further rate momentum in affected lines, so it could be a lot more difficult for some than anticipated, and this includes the NFIP.
While it remains unclear how high the NFIP’s claims burden will be from hurricane Ian, catastrophe risk modeller RMS said recently that it estimates NFIP losses of some $10 billion as a result of the event. If this comes to fruition, hurricane Ian’s storm surge and inland flooding impacts would completely erode FEMA’s NFIP reinsurance tower and catastrophe bonds.
As a reminder, FEMA’s 2022 traditional reinsurance tower is structured to cover 4.163% of losses between $4 billion and $6 billion; 26.565% of losses between $6 billion and $8 billion; and 22.453% of losses between $8 billion and $10 billion.
As of few days ago, FEMA said that it had received 31,000 NFIP claims following Ian. Analysis shows that at a rough average claims cost from hurricanes with a heavy surge component, that could result in gross losses of somewhere between $2.5 billion and $3 billion.
So, there’s still some way to go before the NFIP’s reinsurance protection would kick in, but it does seem as though the lower layers of the tower are certainly at risk.
Again, it’s going to take some time before the ultimate hit to the NFIP is understood, but the fact claims are continuing to come in as FEMA is calling on its reinsurance partners to submit a request to participate in the 2023 placement by December 1st, 2022, suggests it could be both more challenging and costly than in previous years.
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