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 from the private market could reduce the likelihood of the Federal Emergency Management Agency (FEMA) needing to borrow from the Treasury to pay claims. In addition, this could allow the NFIP to recognize some of its flood risk up front through the premiums it pays for risk transfers rather than after the fact borrowing from Treasury. Using reinsurance to cover losses that occur in the more extreme years could help the NFIP to reduce the volatility of its losses over time. However, because reinsurers understandably charge the NFIP 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.
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