Will first flood cat bond be registered in Bermuda?

In an announcement that will be of great interest to Bermuda’s growing insurance-linked securities (ILS) community, the US Federal Emergency Management Agency (FEMA), which manages the National Flood Insurance Program (NFIP), has said that it is exploring the possibility of using an ILS transaction to transfer risk to the capital markets.

FEMA said such a deal, which would represent the first time purely flood risk has been transferred into the capital markets in this way, said this will continue to expand the role of the private markets in managing US flood risk. The agency is hoping to launch the deal as soon as July.

The agency has not yet revealed further details of the deal but it seems likely Bermuda would be involved in some capacity – some 80 percent of all ILS deals last year were registered in Bermuda and the market boasts the expertise and capacity to help craft an innovative transaction such as this.

FEMA first purchased reinsurance in 2017 and recovered $1.04 billion from the private markets due to losses from Hurricane Harvey. In early January 2018, FEMA secured a further $1.46 billion in reinsurance from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event occurring in calendar year 2018.

The body said that using ILS will allow it to transfer risk through two avenues – the traditional reinsurance markets and the capital markets. Engaging both markets will create more competition and reduce the NFIP’s risk transfer costs. It will also enable FEMA to access greater market capacity and spread its risk across a more diverse pool of companies and investors.

“The NFIP requires a stronger financial framework built on expanding our portfolio of actuarially-priced policies. Transferring more of the risk burden to the private capital markets continues to be part of that strategy,” said Roy Wright, director of FEMA’s National Flood Insurance Program.

“During the second largest loss year in the program’s history, the reinsurance marketplace came through and supported the NFIP. We expanded the traditional reinsurance cover earlier this year. Now we will continue that risk transfer by tapping the capital markets.”