Most Americans with homes have homeowners’ insurance. We buy it to protect ourselves in the unlikely event that something big, bad and expensive happens to our house or property. We buy it every year for peace of mind, even though we hope not to experience a loss.
Similarly, FEMA is now using reinsurance to protect the National Flood Insurance Program (NFIP) against large and uncertain costs of extreme flooding events. Reinsurance is an important risk management tool used by insurance companies and public entities to protect themselves from large financial losses. In other words, reinsurance serves as insurance for insurance companies.
As of January 1, FEMA secured reinsurance to share a meaningful portion of the risk of large and unexpected flooding with private reinsurance markets. This placement of reinsurance transferred $1.042 billion in risk above a $4 billion deductible to 25 reinsurance companies. Securing reinsurance is a key step towards achieving the NFIP’s long-term vision of building a stronger financial framework.
To understand why this is an important step forward, we look back at the history of the NFIP.
In 1968, the federal government began offering flood insurance to homeowners who were unable to purchase affordable flood insurance from the private sector. Since then, the federal government has offered flood insurance premiums lower than the true risk in flood-prone areas would dictate.
While the NFIP appeared to be able to cover the cost of its flood losses from pooled premiums of the insured for many years, that is no longer the case. The NFIP’s exposure to major floods is on the rise, as evidenced by Hurricanes Katrina and Sandy. These events generated claims of approximately $24.6 billion, leaving the NFIP $23 billion in debt to the U.S. Treasury.
Although these floods felt like once-in-a-lifetime events, there is actually a 50 percent chance within a ten-year period the NFIP will once again experience Hurricane Sandy-sized losses.
After Hurricanes Katrina and Sandy, FEMA explored new tools to manage potentially major flood risk. In 2013, FEMA began setting aside a portion of premiums in a reserve fund to help cover losses from future major floods. In September 2016, FEMA made its first step towards reinsurance with a placement of $1 million in coverage. This month, FEMA expanded its 2016 placement and re-engaged the private sector in flood risk.
Flood insurance policyholders could also help reduce the risk and cost to all Americans when it comes to flood damage. I invite you to join nearly four million policyholders in almost 1,400 communities who have called on their local governments to take steps towards reducing the threat of flooding by enforcing stronger building standards, restoring green space, and taking other important mitigation measures. The NFIP Community Rating System discounts premiums for communities that take such steps.
Individual policyholders could further build their resilience to flooding by elevating and otherwise flood-proofing their homes. FEMA’s Increased Cost of Compliance coverage helps cover the costs of rebuilding flood-damaged homes and businesses in order to meet communities’ mitigation requirements.
Even with the resiliency efforts described above, there are still millions of Americans at significant risk of a flood damaging or destroying their homes. To protect against flooding and its consequences, all at-risk homeowners need to buy and maintain a flood insurance policy.
Just as we ask you to insure yourselves against the large and unexpected costs of an extreme flooding event, we have secured reinsurance to protect the NFIP against the same.
For more information on the NFIP Reinsurance Program, please see our frequently asked questions.