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1 1 (May 28, 2024)

handle is hein.crs/govepxb0001 and id is 1 raw text is: The National Flood Insurance Program (NFIP), Reinsurance, and Catastrophe Bonds Updated May 28, 2024 Insurance transfers risk from one entity who does not want to bear that risk to another entity that does. An initial insurance purchase, such as homeowners buying a policy to cover damage to their home, is often only the first transfer of that risk. The initial (or primary) insurer may then transfer (or cede) some or all of this risk to another company or investor, such as a reinsurer. Reinsurers may also further transfer (or retrocede) risks to other reinsurers. Such transfers are, on the whole, a net cost for primary insurers, just as purchasing insurance is a net cost for homeowners. The Homeowner Flood Insurance Affordability Act of 2014 (P.L. 113-89) revised the authority of the National Flood Insurance Program (NFIP) to secure reinsurance from private reinsurance and capital markets. Risk transfer to the private market could reduce the likelihood of the Federal Emergency Management Agency (FEMA) borrowing from the Treasury to pay claims. In addition, it could allow the NFIP to recognize some of its flood risk up front through premiums it pays for risk transfers rather than after-the-fact borrowing, and could help the NFIP to reduce the volatility of its losses over time. However, because reinsurers charge premiums to compensate for the assumed risk as well as the reinsurers' costs and profit margins, the primary benefit of reinsurance is to manage risk, not to reduce the NFIP's long- term fiscal exposure. Reinsurance The most common form of risk transfer is a primary insurer purchasing coverage for its risks from another (re)insurer. Reinsurance is particularly important to smaller insurers who may not be large enough to spread correlated local risks, such as a storm hitting a specific area. Reinsurers generally have the size to diversify risks globally, as natural hazard events are assumed to be uncorrelated: a hurricane making landfall in Florida is assumed to be independent of a wildfire in California. NFIP Reinsurance Purchases The NFIP's first large reinsurance purchase was in 2017, with additional purchases annually from 2018 to 2024. The details ofthese purchases have varied, but they have all covered losses from a single flooding event covering losses varying between $4 billion and $11 billion, with potential payouts of $1.042-$1.46 Congressional Research Service https://crsreports.congress.gov IN10965 CRS INSIGHT Prepared for Members and Committees of Congress

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