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FEMA raises reinsurance with first cat bond

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The US Federal Emergency Management Agency (FEMA) has directly tapped capital market investors for the first time, to lift its flood reinsurance to $US1.96 billion ($2.64 billion) following last year’s damaging hurricane season.

FEMA has entered a three-year agreement with Hannover Re, which is sponsoring a $US500 million ($673 million) catastrophe bond through a special-purpose subsidiary. The coverage took effect last Wednesday.

It adds to the $US1.46 billion ($1.97 billion) traditional reinsurance program provided by 28 companies for the National Flood Insurance Program (NFIP) this year.

“Engaging capital markets was the logical next step in maturing the NFIP reinsurance program in a way that benefits policyholders and taxpayers, and expands the role of the private markets in managing flood risk in the US,” NFIP CEO David Maurstad said.

The agreement is structured to cover, for a given event, 3.5% of losses from $US5-$US10 billion ($6.7-$13.5 billion), and 13% of losses from $US7.5-$US10 billion ($10.1-$13.5 billion). FEMA will pay $US62 million ($83 million) in premium for the first year.

Guy Carpenter and GC Securities were contracted for the placement, and Aon Benfield provided financial advisory services.

Last year FEMA locked in $US1.04 billion ($1.4 billion) of traditional reinsurance, which it recovered in full following Hurricane Harvey.