The insurance industry has seen the writing on the wall for years now when it comes to the pervasiveness of increasingly destructive natural disasters. This is particularly true when it comes to flooding. As a result, the Federal Emergency Management Agency (FEMA) has been moving future catastrophic flood insurance losses to the private sector for several years. 2019 marks the third year in a row that the agency has made that move.
FEMA recently announced their 2019 traditional reinsurance placement for the National Flood Insurance Program (NFIP) will transfer $1.32 billion of the NFIP’s financial risk to the private insurance market. This agreement affects 28 different private reinsurance companies and will be in effect from January 1, 2019 to January 1, 2020.
So what exactly does this mean? It means that if a named storm creates a flooding event large enough to trigger the reinsurance agreements than FEMA would receive payments from the private sector. This will give the Federal agency the funds it needs to help mitigate disaster conditions whenever they occur.
David Maurstad, chief executive of the NFIP spoke with the Insurance Journal about this, saying that “It takes an entire community to prepare for disasters, and that includes participation from the private sector. Through reinsurance, FEMA partners with private markets to build a pillar that supports a sound financial framework for the NFIP by a meaningful transfer of flood risk,”.
According to FEMA the agreement will cover 14% of losses between $4 billion and $6 billion; 25.6% of losses between $6 billion and $8 billion and the same amount between $8 billion and $10 billion.
Natural disasters are not going anywhere, and if the scientific consensus is to be believed they are only going to get worse as time goes on. As a result, the insurance industry will continue to take steps like these to stay ahead of the issue.