Bermuda can play key role in US flood solutions

One key to the future of managing flood risk in the US is finding the right way for the government to help people secure insurance, closing the flood insurance gap. Key to achieving that will be gradual reforms to the National Flood Insurance Program (NFIP) and the participation of the private sector, including Bermuda reinsurers, a panel of experts agreed at a panel discission yesterday at the Bermuda Climate Summit, taking place this week (June 26-27).

The session, called ‘The US Federal Flood Programme and the Re/insurance Sector’, was moderated by Peter Giacone (pictured), Global Head of Insurance, KBRA. Panellists comprised: Chlora Lindley-Myers, NAIC President and Director, Missouri Department of Commerce and Insurance; Christopher Sykes, Managing Partner, Guy Carpenter; Chris Brown, Partner, Mindset; and Andy Neal, Managing Director, Public Private Partnerships, Aon.

“The definition of insanity is doing same thing time and time again and expecting a different outcome,” Neal said. But his point was that the NFIP is changing and has been for some time, in ways that should allow for a better understanding of flood risk and deeper partnerships with the private sector as a result.

Before Aon, Neal worked for The Federal Emergency Management Agency (FEMA), which manages the NFIP, where he was National Flood Insurance Program Chief Actuary and Branch Chief, Actuarial and Catastrophic Modelling.

He led the actuarial and catastrophe modelling teams to support the more than 4 million policyholders of the agency’s National Flood Insurance Program (NFIP) – representing over $4 billion in insurance premium and more than $1.3 trillion of coverage. He also led the implementation of the NFIP’s first reinsurance and catastrophe bond covers.

“We started buying reinsurance for first time and we launched a cat bond for the first time. When we entered into those transactions, we wanted to get comfortable with working with the private sector while also bringing billions of dollars to this risk,” he said. And he explained how, in part, those deals were the catalyst for a process of change.

He explained how the NFIP has become an advocate for changing how flood risk and resilience is thought about and managed in the US. It is looking to set standards that could even transcend the US market and be used elsewhere around the globe in terms of how flood risk is managed.

Key to this process, he said, was reconsidering how flood risk is rated. It no longer relies on simple flood maps, he said, but has instead developed a methodology that takes in numerous models and data points.

“There is a lot of uncertainty. By using multiple models, we looked to set a clear course through that cloud of uncertainty,” he said.

He also explained how progress has been made in terms of understanding where it is safe to build – and to not build. He said that many previous models were oversimplistic in terms of how they assessed the vulnerability of structures. “Our recommendation is that you should not build in a way that is uninsurable,” he said. “We also acknowledge that this is not a risk that is static. The flood risk data shows that this is a risk that is always changing.”

Sykes at Guy Carpenter described how he worked with Neal on the first reinsurance placement in 2016. It then secured a bigger placement in 2017 using a consortium of 25 reinsurers. A combined total of $1 billion of the NFIP’s flood risk was transferred to the private reinsurance market.
That same year, Hurricane Harvey struck, triggering the policy. “There were a lot of sceptics but we collected $1 billion in five days including from many Bermuda reinsurers.”

The next year, the size of the placement increased. He said key to that process being successful was the fact that NFIP learned to speak the language of the private sector.

“We learned to speak the language of reinsurers and that helped raise interest in flood insurance. In parallel, they developed expertise. So when we brought the programme to reinsurers there was the expertise and capacity to complete it.”

He did note that the hard market has hit the capacity available. The NFIP’s 2023 placement transferred $502.5 million of flood risk to the private reinsurance market using 18 private reinsurers. When compared with its 2022 January renewal, the placement was some 50% smaller, while the attachment point has risen.

Brown stressed that he believes the flood programme needs reform. It has now been renewed by Congress without change some 25 times. But also explained how neither side of the political divide want their constituents to pay more for flood insurance.

“Therefore, it is more a case of pushing for incremental change,” he said. “We want to improve take-up rates and shift the financial burden of disaster from taxpayers to private markets. We want to focus on pre-disaster mitigation, which is much less expensive than post-disaster recovery.”

Lindley-Myers added that the key problem around penetration of flood insurance is AI: apathy and ignorance. “People who live on flood plains or in earthquake zones think it will not happen to them and, if it does, the government will take care of it. We try to educate on why people should buy flood insurance separately.”