FEMA Purchases a Catastrophe Bond

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FEMA Purchases a Catastrophe Bond

The Federal Emergency Management Agency has finally secured a reinsurance placement for the National Flood Insurance Program that for the first time is directly backed by capital markets investors. As of now, the Federal Emergency Management Agency (FEMA) has entered into a three-year reinsurance agreement that was effective starting August 1st, 2018.

In April, FEMA announced that they wanted to buy a catastrophe bond. A catastrophe bond works like reinsurance where the investor gets a return unless the disaster’s cost exceeds a certain threshold set by the government. However, the Federal Emergency Management Agency didn’t say how much the bond would pay out.

A catastrophe bond is a high-yield debt instrument that is usually insurance-linked and meant to raise money in case of a catastrophe such as a hurricane or an earthquake. If the insurance company or reinsurance company suffers a loss from a particular pre-defined catastrophe, then its obligation to pay interest or repay the principal is either deferred or forgiven.

When it comes to catastrophe bonds, they are generally not closely linked with the stock market or economic conditions. The bonds also typically offer a competitive yield compared to their risk. However, even though these bonds reduce risk to insurance companies, historically these transactions have resulted in a loss to investors.

The three-year reinsurance agreement, the coverage for a given flood event is $62 million in premium for the first year of coverage. In January, FEMA secured $1.46 billion in traditional reinsurance coverage from 28 reinsurance companies to cover any qualifying NFIP flood losses in excess of $4 billion per event.

With both of these reinsurance placements combined, the August 2018 placement enables FEMA to transfer $1.96 billion of the NFIP’s flood risk for the 2018 hurricane season to the private sector.

AWS wants to keep you and your family safe this hurricane season. Contact us today and learn how our policies can protect you.

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Melinda Martin

Account Executive

Melinda began her insurance career in 1985 with Alexander & Alexander where she received her Property & Casualty and Life & Health license. Since then she has worked at various agencies in the New Orleans area and in California as a senior account manager for Employee Benefit Plans.  While in California, she was also the Membership Director for the Burbank Chamber of Commerce. Melinda joined the AWS team in July of 2015.

Michael A. Seeling

Vice President

Graduated from the University of Louisiana at Lafayette with a B.A. in Insurance Risk Management and is a graduate of Archbishop Rummel High School in New Orleans. He joined AWS in October of 2008 and has been awarded the Patient Protection and Affordable Care Act Certification (PPACA). Additionally, he is working towards his Certified Insurance Counselor (CIC), Registered Health Underwriter (RHU), and Registered Employee Benefits Consultant (REBC) designations. He is also a member of the National Association of Health Underwriters (NAHU), National Association of Insurance Financial Advisors (NAIFA), and is an active member of the Fore!Kids foundation.