National Flood Insurance Program (NFIP), Reinsurance, and Catastrophe Bonds [Updated October 5, 2020] [open pdf - 630KB]
From the Document: "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."
CRS Insight, IN10965
Congressional Research Service: https://crsreports.congress.gov/