In an effort to stabilize the National Flood Insurance Program (“NFIP”), Congress passed several bills that allowed the NFIP to access the private reinsurance market. First piloted in 2016, in 2017 the program resulted in a broker-placed $1.042 billion cover with 25 private reinsurance markets.  The 2017 catastrophe excess-of-loss program provides coverage of 26% of losses between $4 billion and $8 billion for a premium of $150 million.  Because of Hurricane Harvey, the NFIP’s catastrophe excess-of-loss program has been triggered and NFIP has put in a claim for the full $1.042 billion to the reinsurers.  What happens next?

For years, the private reinsurance market has indicated a strong interest in providing protection for flood risk. With the legislation in place, the private reinsurance market got its wish and nearly out of the gate it has been hit with a limits loss on this cover. Now the claim assessment begins. Given the reinsurance market’s interest in participating in flood insurance, it will be interesting to see what, if any, issues arise in reviewing the cession of the Hurricane Harvey claim.

Although it appears clear that damages from Hurricane Harvey will exceed $8 or $9 billion, the terms and conditions of the excess-of-loss reinsurance contract must be met for the reinsurers’ obligation to trigger under this contract.  While those terms and conditions are not readily available, to be sure there are a number of specifics that must be satisfied for the reinsurers to respond to NFIP’s claim.  Reinsurers might question how the NFIP claims are being valued, whether the valuations are based on actual NFIP payments or on a third-party certification of loss levels (similar to cat bonds), how are the underlying claims being examined to avoid fraudulent claims, and what inspections have taken place to verify claims?  I am sure there are many other issues that could arise. All will depend on compliance with the terms and conditions of the excess-of-loss agreement. Will some reinsurers resist and will disputes arise?

My guess is that FEMA, on behalf of the NFIP, has followed all the notice and proof of claim requirements and that the excess-of-loss agreement will pay at its maximum limit. Given the newness of this program, the private reinsurance market has an incentive to make it work. The next question, however, is what the 2018 program will look like given this total loss.