1.Reinsurance/Cat Bonds:
Q) What was the original intent behind FEMA's reinsurance and catastrophe bond
placements?
The NFIP Reinsurance Program helps FEMA manage the future exposure of the NFIP through
the transfer of flood risk to private reinsurers. With the impacts of several large flood disasters
over the past years, the NFIP experienced situations where the cost of flood insurance claims
far exceeded premium revenues and accumulated surplus. This resulted in the NFIP incurring
increased debt to the U.S. Treasury.
Through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner
Flood Insurance Affordability Act of 2014 (HFIAA), Congress authorized FEMA to secure
reinsurance from the private reinsurance and capital markets. “In response, FEMA created the
NFIP Reinsurance Program to better prepare financially for potential losses from significant
flooding events like Hurricanes Harvey (2017), Sandy (2012), and Katrina (2005)” stated
Maurstad.
Q) What are the benefits and drawbacks of reinsurance and cat bonds? How are reinsurance
and/or cat bonds advantageous over keeping the NFIP a program largely financially backed by
the Treasury?
FEMA secures reinsurance to protect itself against a portion of its potential flood claim liability
and “provide an additional method to fund payment of flood claims after a catastrophic event”,
Maurstad indicated. Securing reinsurance does not reduce the size of NFIP’s current debt to the
U.S. Treasury; rather, it is intended to reduce the accumulation of future debt.
Reinsurance agreements are between FEMA and reinsurers, and do not impact the NFIP’s
contracts with its policyholders. Rather, reinsurance provides the NFIP an additional method to
fund payment of flood claims to policyholders and decrease the likelihood that the NFIP will
need congressional action to increase its borrowing authority with the U.S. Treasury.
Reinsurance has a cost, but Maurstad indicated “FEMA’s previous reinsurance placements did
not result in an increase in NFIP policyholders’ rates”. As the NFIP Reinsurance Program
expands in the future, FEMA will work with the Administration and Congress to determine how
to cover the costs of a larger program.

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 Q) When did FEMA first become interested in reinsurance and/or cat bonds as a mitigation
strategy?
Through the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowner
Flood Insurance Affordability Act of 2014 (HFIAA), Congress authorized FEMA to secure
reinsurance from the private reinsurance and capital markets. In response, Maurstad said,
“FEMA created the NFIP Reinsurance Program to better prepare financially for potential losses
from significant flooding events like Hurricanes Harvey (2017), Sandy (2012), and Katrina
(2005)”.
In 2013, FEMA commissioned the Flood Insurance Risk Study (FIRS) to comply with
requirements in the Biggert‐Waters Flood Insurance Reform Act. The study resulting from the
FIRS project was prepared by Guy Carpenter & Company LLC (“GC”) in cooperation with Oliver
Wyman, Inc. and AIR Worldwide. GC provided the reinsurance study to FEMA in September
2014. The study concluded that, despite the cost, reinsurance would help the NFIP stabilize the
NFIP’s financial results and lead to a reduction in the probability of borrowing after large flood
events. The results of this study along with the additional authorizations granted to FEMA in the
Homeowner Flood Insurance Affordability Act of 2014 led FEMA to pursue the purchase of
reinsurance for the 2017 calendar year.
In January 2017, FEMA made a cornerstone placement of reinsurance for the 2017 calendar
year, transferring $1.042 billion of the NFIP’s financial risk to 25 reinsurers through January 1,
2018.

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 Q) What is FEMA's overall strategy going forward with reinsurance and cat bond
placements? Does FEMA plan to expand or reduce the amount of the annual placements? If
so, by how much and why?
In January 2017, FEMA made a cornerstone placement of reinsurance to establish a multi-year
NFIP Reinsurance Program. Continuing this risk management practice, FEMA secured $1.46
billion in traditional reinsurance to cover any qualifying flood losses occurring in calendar year
2018. In August 2018, FEMA entered into a three-year reinsurance agreement to transfer $500
million in flood risk to the capital markets. In January 2019, FEMA secured $1.32 billion in
reinsurance to cover any qualifying flood losses occurring in calendar year 2019. In April 2019,
FEMA entered into a three-year reinsurance agreement to transfer $300 million of the NFIP’s
flood risk to the capital markets.
Next steps include expanding the NFIP Reinsurance Program and preparing for future
engagements with the reinsurance markets. In practice, this looks like:
· Clarifying the Reinsurance Program’s vision, strategy and operations based on lessons learned
to build a multi-year strategy;
· Expanding the NFIP’s flood modeling capabilities to inform pricing and business strategies;
· Exploring additional forms of reinsurance; and
· Engaging industry partners to better inform the NFIP as it continues to build the reinsurance
program.
Q) The reinsurance and cat bond placements require FEMA to work closely with private firms
to structure deals. In the case of cat bonds, these deals are often domiciled in offshore
vehicles in Bermuda. What does FEMA make of the transparency of these private sector
placements?
FEMA secures reinsurance in order to transfer NFIP flood risk to the capital markets as
authorized by Congress under BW-12 and HFIAA. FEMA can only obtain reinsurance from
companies based in countries designated under the Trade Agreements Act of 1979 (TAA), such
as Ireland. FEMA has entered into reinsurance agreements with Hannover Re (Ireland)
Designated Activity Company (DAC), a reinsurance company that is in a TAA-compliant country,
Ireland.
To comply with financial regulation and facilitate the economics around catastrophe bonds,
Hannover Re (Ireland) DAC established a special purpose reinsurer (SPR), FloodSmart Re Ltd. in
Bermuda that exists for the sole purpose of issuing the catastrophe bonds to investors and
carrying out the SPR’s obligations to Hannover Re (Ireland) DAC and investors under a
retrocession agreement.

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 Q) How does FEMA respond to concerns/comments from consumer advocates that NFIP's
reinsurance and cat bond placements represent an added taxpayer cost with no
demonstrated or certain benefit?
Let me begin by providing a broader view of reinsurance. Reinsurance is an important risk
management tool used by insurance companies to protect themselves from large financial
losses. In other words, reinsurance is insurance for insurance companies. Insurance providers
pay premiums to reinsurers. In exchange, reinsurers provide coverage for losses incurred by
insurance providers up to a specified amount negotiated by both parties.
Private insurance companies around the world commonly use reinsurance as a tool to manage
risk. Public entities also secure reinsurance. Several U.S. states utilize reinsurance coverage,
including the Citizens Property Insurance Corporation of Florida, the California Earthquake
Authority, and the Texas Windstorm Insurance Association. Numerous countries also rely on
reinsurance to manage their disaster risk programs, including the United Kingdom’s Flood Re
program, New Zealand’s Natural Disaster Fund, and the Philippines’ National Reinsurance
Corporation.
Now about FEMA’s use of reinsurance…with the reinsurance program in place in 2017, the NFIP
recovered $1.042 billion from the private markets due to losses from Hurricane Harvey.
Without reinsurance in place, FEMA would have had to borrow this amount and it would have
increased FEMA’s debt to the Treasury. Currently, FEMA’s reinsurance program has $2.12
billion in coverage. If the reinsurance program in 2017 was equivalent in size, FEMA could have
recovered $1.85 billion after Hurricane Harvey, an increase of 78 percent of the amount of
NFIP’s losses that would have been covered.
“Whether or not a catastrophic flood event happens in a given year, purchasing reinsurance
transfers NFIP risk to the private sector”; Maurstad stated, “This improves long-term financial
strength of the program.”
This business decision for NFIP is like an individual deciding to purchase homeowners or auto
insurance to manage their financial risk. They do not plan to experience a fire or car accident,
and probably won’t, but purchasing insurance provides financial security should the unexpected
occur.

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 2. Risk Rating 2.0
Q. Please explain FEMA's current approach to Risk Rating 2.0 from an affordability
standpoint.
FEMA recognizes and shares concerns about flood insurance affordability. In setting rates,
FEMA does not have the statutory authority to consider affordability but does ensure that
premium rate transition is aligned with all statutory caps in place by Congress.
As required by law, FEMA developed an Affordability Framework that was delivered to Congress
in 2017 to help policymakers consider how to provide targeted assistance to current and
potential policyholders. FEMA will continue to work with Congress to examine options to make
flood insurance more affordable.
The truth is many policyholders under the current system pay more than they should. Under
Risk Rating 2.0, they will benefit, and possibly see lower premiums, when we move away from a
mapping zone to property specific premiums.
In addition, FEMA is expanding mitigation credits for properties outside of the Special Flood
Hazard Area (SFHA). For example, mitigation credits may be given for installing flood vents
constructed in accordance with NFIP regulatory requirements, elevating machinery or
equipment above the first floor, or elevating a structure onto posts, piles, or piers.
FEMA is also leveraging industry standards and technology to determine elevations for all
properties and no longer requiring Elevation Certificates (ECs) in order to purchase an NFIP
policy. This is likely to result in premium decreases for many of the policyholders who have not
been able to obtain ECs under the current NFIP rating structure.

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 Q. Please explain FEMA's approach to Risk Rating 2.0 from an environmental justice
standpoint.
FEMA’s goal is to deliver rates that are fairer, easier to understand, and better reflect a
property’s unique flood risk, Maurstad stated.
Our initial rating plan was based on the amount of insurance a property owner can purchase
without taking into consideration underlying home values. Over time, this has inadvertently
caused a disparity—policyholders owning lower-valued homes are paying more than their share
of the risk, while policyholders with higher-valued homes are paying less. There is also a
disparity at the edge of flood zones resulting in neighboring property owners having dramatic
differences in their flood insurance premiums.
Risk Rating 2.0 will account for the cost to rebuild a home as part of the premium, as well as
taking a property’s proven factors and unique flood risks into account to correct unfair
disparities. This aligns with insurance industry best practices.
Q. What role have private firms played in the development in RR 2.0? What role will private
firms play in the execution of RR 2.0?
To update Risk Rating, standards are being aligned with general insurance industry best
practices. This includes accounting for the cost to rebuild a home as part of the premium, which
will make rates fairer and better reflective of a property’s unique flood risk. Through these
efforts, the private sector will have better information to inform their own models. Like other
initiatives we are undertaking, we look to be a leader that industry can follow.
Only 3.5% of flood insurance policies are in the private market and we believe there is room for
all of us to expand coverage against the risk of flood. Policyholders should consider private
flood insurance alternatives to the National Flood Insurance Program (NFIP) and compare
premiums with coverage to select which product is a better fit for their risk.

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 Q. Please explain FEMA's approach to private catastrophe modeling under RR 2.0 and how
this differs from the existing rating process.
FEMA is using a combination of models to support the development of rates. We are pairing
state-of-the-art industry technology (e.g., catastrophe (CAT) models) with the NFIP’s mapping
data to establish a new risk-informed rating plan. The CAT models in combination with the
ability to leverage the NFIP’s mapping data provide a better and more comprehensive
understanding of risk at both the national and local level.
The existing rating process involves classifying properties according to their general flood risks
using their flood zone on a Flood Insurance Rate Map (FIRM), along with some other general
information, such as building type and bottom floor elevation. Risks and rates were not
individualized as they will be under Risk Rating 2.0.
Q. How will RR 2.0 differ from FEMA's current rating process?
FEMA is incorporating private-sector data sets, catastrophe models, and evolving actuarial
science with existing NFIP flood hazard data, to calculate a property’s true risk rate.
Risk Rating 2.0 will determine a customer’s flood risk by incorporating:
• Multiple, logical rating characteristics – such as different types of flood, the distance a
building is from the coast or another flooding source, and the cost to rebuild a home.
• A broader range of flood frequencies – the current rating methodology is solely dependent
on the flood hazard depicted on the Flood Insurance Rate Map (FIRM), the 1percentannual-chance-event.
The existing rating process involves classifying properties according to their general flood risks
using their flood zone on a Flood Insurance Rate Map (FIRM), along with some other general
information, such as building type and bottom floor elevation. Risks and rates were not
individualized. Rates under Risk Rating 2.0 will reflect a property’s true, individualized flood risk,
resulting in a system that is fairer and easier to understand.

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 Q. What provisions are being built into RR 2.0 to ensure citizens have access to proprietary
data used to determine their risk levels?
FEMA is using data from various sources, such as:
• FEMA sourced: Existing mapping data, NFIP policy, and claims data;
• Other Federal Government sourced: U.S. Geological Survey (USGS) publicly available data,
National Oceanic and Atmospheric; Administration (NOAA) Sea, Lake, and Overhead Surges
from Hurricanes (SLOSH) data, and U.S. Army Corps of Engineers (USACE) data sets; and
• Third-party: Commercially available structural and replacement cost data and catastrophe
flood models. This is not a complete list of all data sets, and FEMA may add additional data
sets in the future. Citizens are encouraged to access information on their property’s
individualized flood risk through reaching out to an insurance agent who offers NFIP
policies.
Q. What steps are being taken to ensure that homeowners will be aware of RR 2.0 prior to
2021?
Over the course of the next year, FEMA will continue to actively engage with Congress and
other key stakeholders to ensure transparency and visibility as we work to transform the NFIP.
We know we must get this right—and once we have a methodology that we can stand behind,
we will deploy clear and transparent messaging to ensure homeowners have all the information
they need to understand their rates and prepare for the October 2021 implementation. We
encourage homeowners to reach out to their agents in the months before the rate
implementation to get information on their property’s unique flood risk profile and learn about
any associated mitigation options that might help lower their premiums.
FEMA plans to offer mitigation credits to help incentivize risk reduction efforts and reduce
the cost of future flood events. Risk Rating 2.0 will initially provide credits for three
mitigation actions:
•
•
•

Installing flood openings per the 44 CFR 60.3 criteria;
Elevating onto posts, piles, and piers;
Elevating machinery and equipment above the lowest floor.

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 Q. Can you explain FEMA's decision to delay implementation of RR 2.0 by one year?
Earlier this year FEMA announced that we were planning to implement Risk Rating 2.0 for
single-family homes nationwide in October 2020. This new rating system would be fairer, easier
to understand and better reflect a property’s unique flood risk.
On November 7, FEMA announced that the implementation of Risk Rating 2.0 will be adjusted o
October 1, 2021, (traditionally, October is the month FEMA adjusts premium rates under the
National Flood Insurance Program [NFIP]).
Additional time is required to communicate with policyholders allowing them enough time to
understand what the changes mean, and to give our agents ample opportunity to test and
integrate with the new rating engine. This extension allows for all National Flood Insurance
Program (NFIP) policies – including, single-family homes, multi-unit and commercial properties
– to changeover to the new rating system at one time; thereby reducing the complexity of a
phased approach, as originally proposed. We want to protect policyholders by ensuring an easy
transition to Risk Rating 2.0 that allows time for property owners to secure their flood
insurance coverage and take advantage of any associated mitigation options that might help
lower their premiums.

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 Q. In the press release from earlier this month, FEMA specifically noted, "some additional
time is required to conduct a comprehensive analysis of the proposed rating structure so as
to protect policyholders and minimize any unintentional negative effects of the transition."
What is meant by "unintentional negative effects and "protect policyholders?"
Additional time is required to communicate with policyholders allowing them enough time to
understand what the changes mean, and to give our agents ample opportunity to test and
integrate with the new rating engine. To achieve this, FEMA is adjusting the implementation of
Risk Rating 2.0 by one year, to October 1, 2021. This extension allows for all National Flood
Insurance Program (NFIP) policies – including, single-family homes, multi-unit and commercial
properties – to changeover to the new rating system at one time; thereby reducing the
complexity of a phased approach, as originally proposed. We want to protect policyholders by
ensuring an easy transition to Risk Rating 2.0 that allows time for property owners to secure
their flood insurance coverage and take advantage of any associated mitigation options that
might help lower their premiums.
We believe that a nationwide rollout of new rates in October 2021 will provide consistency
across the country and allow us the opportunity to re-evaluate the most transparent and agile
way to deliver new rates to our policyholders and stakeholders.
We want to protect policyholders by ensuring an easy transition to Risk Rating 2.0 that allows
ample time for property owners to secure their flood insurance coverage, while minimizing any
confusion that would otherwise result from a phased transition and take advantage of any
associated mitigation options that might help lower their premiums.
Q. The same press release noted that it's important that FEMA close "the insurance gap." Can
you please explain what this means? How is this similar or different from the "protection
gap" that is oft-cited by the private insurance industry?
When we refer to the “insurance gap,” we mean the number of properties exposed to flood risk
but not covered by flood insurance. This is different from the “protection gap,” which refers to
the difference in the damage that is covered by an insurance policy compared to the damage
caused by a disaster. According to a 2015 Swiss Re Sigma report, “Underinsurance of property
risks: closing the gap,” the annual expected uninsured losses from earthquake, flood and wind
damage in the U.S. (the largest natural catastrophe perils) total more than $30 billion.
FEMA remains focused on building a culture of preparedness by closing the insurance gap so
that individuals and communities recover quickly and more fully after a natural disaster.

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