Disasters are getting costlier, so U.S. is buying reinsurance

FEMA now is exploring expanding the National Flood Insurance Program.

The federal government, seeking to protect itself from the growing cost of natural disasters, is borrowing a technique from the private sector and buying reinsurance.

The Federal Emergency Management Agency, which started purchasing reinsurance last year for the National Flood Insurance Program, is now exploring the expansion of the program, spokesman Michael Hart said by email Tuesday.

Reinsurance is coverage bought by insurers — or, in this case, FEMA — as protection against unexpectedly high claims.

As the federal government’s exposure to extreme weather and associated natural disasters has grown, so has the reinsurance industry’s role in helping cover that risk. In 2014, Freddie Mac and Fannie Mae began buying reinsurance to protect against a drop in the value of their mortgage loans, including losses caused by natural disasters.

In April, the agency announced its intention to buy a so-called catastrophe bond, which works like reinsurance, with the investor getting a return unless disaster costs to the government exceed a certain threshold. FEMA didn’t say how much the bond would pay out.

Meanwhile, Republican Rep. Dennis Ross of Florida, the vice chairman of the House Financial Services Committee’s Subcommittee on Housing and Insurance, has introduced a bill that would direct FEMA to look at buying reinsurance or similar products for part of its overall disaster costs — not just flooding.

Ross said that change would protect taxpayers from a sudden spike in costs, and also better protect the public from disasters by increasing the government’s incentive to reduce ris.

“Private capital is going to impose good risk-management procedures,” Ross said. “Those are market forces that help dictate safe communities, safe environments, better cities.”

The Reinsurance Association of America, a trade group for the industry, has backed Ross’ proposal, telling him in a letter May 31 that “disaster victims, businesses, and communities could greatly benefit from a reinsurance risk transfer program.”

Disaster and insurance experts said that reinsurance would probably work at sheltering taxpayers from unexpected costs. But they said it’s far from clear that reinsurers would exert enough influence on the government to enact policies that reduce Americans’ exposure to risk — policies that tend to be unpopular, which is why they haven’t been adopted yet.

Reinsurers have significant influence over the decisions made by primary insurers, whose business models depend on reinsurers agreeing to buy their risk, according to Peter Kochenburger, a professor at the University of Connecticut School of Law. But he said that same dynamic doesn’t hold for the government.

The government “can use reinsurance to reduce its risk, but it doesn’t need reinsurance in the way that many insurers do,” Kochenburger said. If reinsurers insist on unpopular changes to where or how people build, FEMA or Congress can say no.