Testing a New Tool to Strengthen Flood Insurance

My recent visits with Baton Rouge, Louisiana flood survivors reinforce the critical role flood insurance plays in returning our citizens to home, work and school after disasters. Already, nearly 29,000 survivors have filed claims for the flooding in Louisiana, and FEMA has paid out over $400 million to policyholders.

One of our priorities at FEMA is to mitigate the impact of natural disasters by building resilient communities and helping Americans recover when damage occurs. A key resiliency resource is the National Flood Insurance Program (NFIP), which saves our country $1.7 billion in avoided flood losses every year.

Today, Americans in all 50 states and territories, hold approximately 5.1 million flood insurance policies guaranteed by the U.S. government through the NFIP. The program has been challenged, however, as the power and frequency of floods have been rising since Hurricane Katrina ravaged the Southern coast in 2005, the 2008 floods devastated the Gulf Coast and Midwest, and Hurricane Sandy raked the East Coast in 2012.

Flood insurance claims have risen beyond the amount that policyholders pay into the program, leaving the NFIP $23 billion in debt to the U.S. Treasury. Let me be clear: while the National Flood Insurance Program is in debt, FEMA retains the ability to pay out flood claims to policyholders quickly and fully. However, to help put the flood insurance program on a firmer long-term financial footing we are making use of new tools provided by Congress to diversify our risk and to lessen the need to borrow from the Treasury. These tools include establishing a reserve fund so additional funding is available when large flood events occur, and creating a reinsurance program.

Reinsurance, a form of insurance for insurance providers, allows the NFIP to share flood risk with private reinsurance companies to help defray the cost of claims from large and unexpected insured events like devastatingly large hurricane-driven floods.

Just this week, we have launched the reinsurance initiative. FEMA purchased reinsurance from three reinsurers, Transatlantic Reinsurance Company, Swiss Re America Corporation, and Munich Reinsurance America, Inc., with brokerage support from Guy Carpenter and Company, a subsidiary of Marsh & McLennanan Companies. We will expand the program in January 2017.

Sharing this risk with the private market will expand the flood insurance program’s ability to cover claims. Reinsurance won’t eliminate the current NFIP debt, but, as we move forward with a long term reinsurance strategy, we expect it will reduce the need to borrow from the Treasury in the future.

The NFIP reinsurance program, when fully implemented, will strengthen the flood insurance program.

Like all insurance, reinsurance requires the insured to pay premiums. Our initial steps will be small enough that the reinsurance we negotiate to buy at a fair and reasonable price to the government will fit within FEMA’s existing budget. Flood insurance policyholders’ rates won’t increase as a result of the reinsurance purchased this week. As we develop the program, FEMA will work with the White House and Congress to determine how to cover the costs.

Reinsurance is a tested, commonly used tool in the private and public sectors around the world, including in the United States. Several states already have reinsurance programs to help defray the cost of losses they must cover due to damage from natural disasters, such as the Citizens Property Insurance Corporation of Florida, California Earthquake Authority, and the Texas Windstorm Insurance Association.

Flooding is the most common and costly disaster we see in America, and FEMA is working hard to ensure that flood insurance is always there when Americans need it most. Watch this space for continued updates as the Reinsurance Program unfolds.

For more information on the NFIP Reinsurance Initiative, please see our frequently asked questions.