The U.S. Federal Emergency Management Agency (FEMA) has solidified its commitment to bolstering the National Flood Insurance Program (NFIP) by obtaining $575 million in reinsurance coverage through insurance-linked securities (ILS) reinsurance.

This marks FEMA’s seventh venture into reinsurance agreements, as it enters into a three-year partnership with transformer reinsurer, Hannover Re (Ireland) Designated Activity Company. Through this collaboration, FEMA has transferred $575 million of the NFIP’s financial flood risk to qualified capital market investors via a special purpose insurer, FloodSmart Re Ltd, for sponsoring catastrophe bonds.

With the inclusion of FEMA’s existing reinsurance coverage from FloodSmart 2022-1 and FloodSmart 2023-1, along with the traditional reinsurance placement in January 2024, the agency has successfully shifted $1.92 billion of the NFIP’s flood risk to the private sector ahead of the 2024 hurricane season.

FEMA’s proactive engagement with reinsurance markets reflects its ongoing commitment to fortifying the financial framework of the NFIP while encouraging private sector involvement in flood-risk management.

Under the terms of the agreements, FEMA will pay approximately $85.7 million in premiums for the first year of reinsurance coverage, excluding initial expenses. Furthermore, the agreement provides coverage for 10% of losses for any single flood event ranging between $8 billion and $9 billion, and 23.75% of losses within the range of $9 billion to $11 billion.

Speaking about the decision, David Maurstad, FEMA’s Assistant Administrator for the Federal Insurance Directorate and Senior Executive of the National Flood Insurance Programme, said: “I’m pleased that FEMA has successfully secured favourable terms for this year’s capital market reinsurance and retained our current level of reinsurance coverage at acceptable rates.

He added: “This latest investment in our reinsurance program reinforces FEMA’s objectives to expand financial tools to achieve a sound financial framework and bolster the programs’ claims paying capacity following extreme flooding events.”