Flood Bill Pushes Private Reinsurance, Cat Bond Solution

Legislation passed by the House on Friday that would extend the National Flood Insurance Program (NFIP) also includes language that require an assessment of “private market” solutions for the troubled program, including purchasing private market reinsurance and the exploration of catastrophe bonds.

The bill, titled the Flood Insurance Reform Act of 2011 (H.R. 1309), includes language that would require the Federal Emergency Management Agency to explore the use of alternative funding sources, including capital markets structures and the global reinsurance markets.

The bill asks FEMA and the NFIP administrator to “determine the capacity of private insurers, reinsurers, and financial markets to assist communities, on a voluntary basis only, in managing the full range of financial risks associated with flooding.”

Language calls for FEMA to report back to Congress in six months after passage of the bill to submit a report on the issue and include proposals.

The bill, which extended the NFIP, was approved by the House Financial Services Committee on Friday and will likely win approval in the full House. It will have to go to the Senate and finally to President Obama for approval. Current legislation funding the NFIP expires on Sept. 30.

Pushing private reinsurers and capital markets structures is something the industry would support as long it came with “risk-based” requirements, said Frank Nutter, president of the Reinsurance Association of America said in Marsh testimony on the bill.

“We believe the NFIP can address its volatility and extreme event exposure and reduce the dependence of the Program on taxpayers and Federal debt through risk transfer to reinsurance and private market capital providers,” Nutter said in testimony before the House Financial Services Committee on Friday. “The NFIP could also seek the placement of catastrophe bonds to augment reinsurance. Both financial sectors have significant capacity and believe flood risk can be reinsured or transferred into capital markets. Utilizing private reinsurance or catastrophe bond risk transfer mechanisms also introduces a private sector rating verification model into the NFIP—thus providing an incentive and guidepost for risk-based rates.”

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