FloodSmart Re (NFIP cat bonds)
The program through which the US federal flood insurance program cedes part of its extreme losses to investors through cat bonds, alongside its traditional reinsurance.
The National Flood Insurance Program is a public insurer that ran up debt to the US Treasury after the major floods of the 2000s and 2010s. To stop passing the entire tail of its losses on to taxpayers, the federal agency that runs it began buying reinsurance, then issuing cat bonds under the FloodSmart Re name. The trigger is indemnity based: it attaches to the program's actual losses above a high threshold, which avoids basis risk but lengthens settlement. The benefit is twofold: the program pays for risk at its market price, which makes the cost of flooding visible, and it diversifies its counterparties between reinsurers and investors. It is an example of a public insurer turning to the market rather than the government for its peak protection.
In January 2017, FEMA bought the NFIP's first reinsurance, 1.042 billion dollars from twenty-five reinsurers. In August 2018, it issued its first cat bond, FloodSmart Re, for 500 million dollars over three years, covering the program's flood losses above a threshold of several billion.
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