A Community-Based Flood Insurance Option (2015)

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Introduction

Floods are one of the nation’s most destructive and costly natural hazards. Floods are also widespread across the nation; from 2010 to 2015, all 50 U.S. states experienced flooding (FEMA, 2015a). During the 2000s, annual flood damages increased dramatically to nearly $10 billion (ASFPM, 2013). The nation experienced disastrous coastal flooding from hurricanes Katrina in 2005 and Sandy in 2012. The National Flood Insurance Program (NFIP) payouts for the damages caused by the two hurricanes totaled roughly $18 billion and $9 billion in flood losses, respectively (FEMA, 2015b). Since 1978, the NFIP has paid more than $60 billion (in 2012 dollars) in flood losses. The historical means of combatting the adverse impacts of floods involved the construction of public works—dams, levees, flood walls and bypass channels. For many decades, however, the limits of these structural approaches to flood risk management have been recognized. A 1966 report from a special task force on national flood policy, for example, noted that despite the investments of substantial and increasing levels of public funds to construct and operate such projects, flood damages continued to rise (Task Force on Federal Flood Control Policy, 1966).

The Task Force report recommended the use of a broad array of options, including flood insurance, floodplain zoning and floodproofing, to lower the high costs of flood disaster assistance and to attenuate levels of flood risk and exposure. Following publication of the report, Congress established the National Flood Insurance Program (NFIP) in 1968. Originally administered by the U.S. Department of Housing and Urban Development (HUD), the program is now administered by the Federal Emergency Management Agency (FEMA). The NFIP has three main components: mapping,

floodplain management, and insurance. Through these components, the program identifies those areas at risk of flooding, aims to reduce flood impacts through mitigation and floodplain management, and offers federal backed flood insurance to protect against flood losses (Hayes and Neal, 2011; GAO, 2013). FEMA’s Federal Insurance and Mitigation Administration (FIMA) manages the NFIP.

Since its inception, the NFIP has achieved success and has faced some substantial challenges. Successes include the following:

• Premiums: In fiscal year 2014, the NFIP collected about $3.8 billion in premiums and insured about $1.3 trillion in property (GAO, 2015).
• Flood losses: The NFIP saves the nation an estimated $1.6 billion annually in avoided flood losses (FEMA, 2011a).

Program challenges include the following:

• Financial debt: Through December 2014, FEMA owed the U.S. Treasury $23 billion (GAO, 2015).
• Repetitive loss properties: Between 1978 and 2011, about 166,000 repetitive loss properties had 496,000 claims paid, costing the program fund $12.1 billion (Congressional Research Service, 2013). Furthermore, repetitive loss properties comprised about 1 percent of insured properties, but accounted for 25-30 percent of flood claims. At the time, this cost the NFIP $200 million per year (FEMA, 2009).
• Takeup rates: The Congressional Research Service (2013) cited a news article that suggested that only 15-25 percent of at-risk properties in the Northeast special flood hazard area (SFHA) have flood insurance (Lee, 2012). An earlier, regional estimate in the Midwest suggested a takeup rate of about 20 percent (Galloway, 1995).
• Affordability of premiums: The Biggert-Waters Flood Insurance Reform Act of 2012 (BW 2012), called for movement toward an insurance program with NFIP risk-based premiums. After the Act went into effect, there were many concerns about the financial burden that these increases would place on policyholders (New Orleans Times Picayune, 2013; NRC, 2015). The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014) was enacted to address affordability concerns. HFIAA 2014 limited affordability relief by repealing or altering some BW 2012 requirements (GAO, 2015). For example, it reinstated grandfathering (NRC, 2015) and introduced an annual premium surcharge.
• Subsidized premiums: As of September 30, 2013, the NFIP had more than 1.1 million subsidized flood insurance policies—about 21

The NFIP is also challenged by widespread assumption that, because it offers insurance policies and shares some features with private insurance that it operates like private insurance, without the need for federal financial support. Indeed the NFIP has features similar to a private insurance program, but has objectives of ensuring reasonable insurance premiums, having NFIP risk-based premiums, securing high takeup rates, and earning premium and fee income to pay for claims and expenses (NRC, 2015). The NFIP’s unique suite of objectives, however, can lead to tradeoffs among its various objectives, which can be difficult to reconcile.

WHAT IS COMMUNITY-BASED FLOOD INSURANCE

Currently, the NFIP offers flood insurance only to individual policyholders. Community-Based Flood Insurance (CBFI) is being investigated as a possible policy option. To some extent, CBFI has already been evaluated as one option among a larger suite of NFIP policy reform options (e.g., FEMA, 2011b; Keybridge Research, 2011). During these earlier evaluations, FEMA (2011b) stated that a community-wide flood insurance premium would be determined by “aggregating the dollar sum of all the individual risk assessments conducted on structures throughout that community.” Additionally, it was assumed that premium costs would be distributed according to an individual’s assessed flood risk and that the policy would be purchased by the community on behalf of its residents. Flood insurance premiums would be collected through mechanisms such as property taxes or utility-like payments (Congressional Research Service, 2013).

In a more recent study (DePue et al., 2014), CBFI was characterized as the following:

• a governmental or quasi-governmental entity that pays a premium,
• the entity having an opportunity to lower insurance costs through mitigation and other measures,
• insurance costs that may be distributed according to property taxes (for example), and
• the individual cost relative to the total cost of a community-wide premium to be determined by the individual contribution to community risk.

The committee did not offer its own specific definition of CBFI, which is more appropriately in the purview of elected officials, federal and state agency staff, and citizens. The committee viewed CBFI in broad terms to

avoid premature narrowing of the discussion. Therefore, this report examines the future prospects for CBFI—whatever form it may take or whatever definitions may be employed.

REPORT FOCUS AND AUDIENCE

This consensus report is the collective effort of a 12-person National Research Council (NRC) committee. This report follows a style that differs slightly from the typical NRC consensus report. This report presents a discussion of theoretical policy options, rather than detailed recommendations for implementing a CBFI option. Much of the report represents the committee’s discussion and collective expert judgment. Consistent with its statement of task (Box 1-1), the committee identifies and examines the future prospects of a CBFI option. It neither advocates nor discourages CBFI, nor does it advise on how a CBFI program may be implemented. As

described herein, CBFI would likely entail both strengths and weaknesses. For example, such an approach has the potential to reduce flood exposure, but at the same time poses some unique implementation and administrative challenges (FEMA, 2011b; Keybridge Research, 2011).

FEMA is the primary audience for this report. Other entities with interest in the topic are the the U.S. Department of Housing and Urban Development and other federal agencies; Congress and congressional staff; local and state officials; flood-prone communities; and private-sector flood insurance companies.

ORIGINS OF THE STUDY

To address many of the NFIP’s challenges, the U.S. Congress passed the BW 2012, key provisions of which required raising flood insurance premiums to reflect flood risks, thereby making the program more financially stable. HFIAA 2014 was later signed into law and called for modifications to the BW 2012 Act. For example, HFIAA 2014 restored grandfathered rates and limited yearly increases of flood insurance premiums (GAO,

2014a). Other changes required a new surcharge mandated on all policies, and a new requirement to designate a new flood insurance advocate. Section 23 of HFIAA 2014 (Box 1-2) required FEMA to assess options for making voluntary community-based flood insurance available through the NFIP. Shortly after enactment of HFIAA 2014, FEMA asked the NRC to convene an expert committee to prepare a consensus report on the future prospects for a CBFI option.

REPORT ORGANIZATION

Chapter 2 summarizes the sponsor and guest speaker presentations that were made during a public committee meeting on January 7, 2015. Chapter 2 also summarizes presentations from invited speakers—from federal, state, regional, private, and nonprofit sectors—during a workshop on March 30, 2015. Two panel discussions occurred during the workshop: (1) community approaches to flood insurance and (2) flood insurance, risk, and management from the community perspective. These information gathering sessions provided useful input to the committee’s deliberations and are reflected in the report’s contents. Chapter 3 describes flood risk management strategies, existing community-based options for managing flood risk, and key flood insurance topics. Finally, Chapter 4 has two main sections—(1) a conception of CBFI, and (2) design considerations for CBFI. Chapter 4 discusses past definitions of a community and CBFI, the solutions that CBFI may provide and the challenges it may face, and considerations for the design of a future policy option.