A Community-Based Flood Insurance Option (2015)

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Workshop Topics and Presentations

The NRC Committee on Community-based Flood Insurance Options met on January 7-8 and March 30-31, 2015, with both meetings convened in Washington, D.C. During an open session on January 7, the committee heard from the study sponsor and guest speakers. The open workshop on March 30 had two panel discussions: (1) community approaches to flood insurance and (2) flood insurance, risk, and management from the community perspective. The January and March 2015 meetings were convened to examine future prospects for community-based flood insurance (CBFI) and, more specifically, to identify and discuss the benefits and challenges of such an option.

This chapter describes both meetings and considers much of what was presented as analogues and lessons learned from past experiences. These past experiences were shared by representatives from federal, state, local and private entities involved in flood insurance and the broader insurance sector.

PRESENTATIONS AT JANUARY 2015 COMMITTEE MEETING

During the January 2015 meeting, Brian Willsey and Andy Neal from FEMA, Washington, DC presented background information on the National Flood Insurance Program, and FEMA’s interest in CBFI. Leonard Shabman and Carolyn Kousky from Resources for the Future (RFF) in Washington, DC discussed CBFI, as well as another NRC study that was at

that time under way to assess issues of NFIP premium affordability.¹ David Maurstad from OST Inc. in Washington, DC presented material on defining community-based flood insurance and key topics that merit consideration.

Brian Willsey from FEMA provided an overview of how communities presently participate in the NFIP. To describe the Community Rating System (CRS), he used a case study from Prince George’s County, Maryland. Communities that participate in the CRS and are within the special flood hazard area (SFHA), the individual property owners are eligible for a reduced flood insurance premium of up to 45 percent.

Andy Neal from FEMA discussed NFIP reform efforts. He noted that during 2009, FEMA conducted a series of listening sessions with stakeholders, which were Phase I of a three-phase approach to reform efforts. Phase II established an analysis framework, and Phase III evaluated NFIP policy alternatives. One of these alternatives/options was CBFI, which was covered in some detail in the Phase III report. He outlined that detail in a presentation prepared by Keybridge Research for the NFIP reform working group (Keybridge Research, 2011). The Keybridge report cited pros and cons for CBFI that relate to flood exposure, costs borne by individuals, political acceptability, and administrative feasibility.

Carolyn Kousky and Leonard Shabman from RFF discussed their views on CBFI and some ongoing relevant research that they are undertaking. They discussed some pertinent background, the potential for community insurance and some policy design options that they had been studying. Leonard Shabman explained that the NFIP was not designed to be an insurance program only, but rather an assistance program with insurance components for assisting with post-flood recovery, encouraging community floodplain management, and increasing awareness of flood risk. Community roles within the NFIP include adopting flood risk prevention and reduction efforts, cooperating in flood risk mapping and participating in the CRS. Kousky noted that community insurance has been discussed at length, but has not been subjected to a detailed evaluation. Kousky and Shabman defined a community insurance policy as “a flood insurance policy purchased by a community on behalf of its citizens that provides coverage for a specified group of structures.” The potential benefits of such an approach to CBFI include a financial incentive, increased resiliency, potential to increase revenues, and lower premiums for individual properties. At the time of the workshop, RFF was undertaking a study funded by the New York Community Trust to evaluate community insurance and produce a report with one or more design questions. Some broad

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¹ The NRC Committee on Affordability of National Flood Insurance Program Premiums issued its first report in March 2015 and the committee’s second report will be issued in late 2015.

issues being considered included community implementation and feasibility, terms of implementation, and the pricing of a community policy.

David Maurstad from OST Inc. (and a member of the NRC committee), coauthored a presentation entitled “Community-based Flood Insurance: Impacts on the Flood Hazard Management Cycle.”² He defined CBFI as “a governmental or quasi-governmental entity that pays a premium to insure.” Examples include individual homes and community infrastructure. The purchasing entity has the ability to lower insurance through active mitigation and higher deductibles. Maurstad elaborated on how a community-wide insurance might be funded—citing property taxes and utility fees not unlike a stormwater fee as examples. He also identified key topics that affect the implementation of CBFI, which include hazard identification, mitigation, management, insurance, and disaster recovery.

At the March 2015 meeting, the committee held two panel discussions of seven invited experts (see Appendix A) representing federal, state, local and private entities that work with flood insurance in a variety of capacities. The first of these workshops focused on community approaches to flood insurance, while the second focused on flood insurance, risk, and management from the community perspective. Each of the seven panelists made presentations in each of the workshops, during which they shared information or perspectives on flood insurance and addressed one or more of the following questions:

• What is community-based flood insurance (CBFI)?
• What features might a CBFI option have?
• What effect might CBFI have on flood risk management?
• How do communities presently participate in the NFIP?
• How would CBFI be integrated into the CRS?
• What is a community?
• How might a CBFI be priced?
• Does CBFI have the potential to reduce flood exposure?
• Is there a market for CBFI?

The remainder of this chapter summarizes the presentations and pertinent comments from each of the panel discussions.

PANEL DISCUSSION I: COMMUNITY APPROACHES TO FLOOD INSURANCE

André McDonald of the Fort Bend Flood Management Association from Texas began with a brief historical overview of flooding and efforts to

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² The presentation was initially presented by Michael DePue of Atkins at an Association of State Floodplain Managers conference on June 1-6, 2014. See DePue et al., 2014.

provide flood insurance in the United States. He identified five issues for the future, which should be addressed when devising effective CBFI: (1) What fundamental scientific knowledge is available to guide the development of such a program; (2) Mounting and supporting a program to provide comprehensive floodplain mapping will be crucial; (3) How much flood protection is really needed; (4) How much flood protection can we afford; and (5) Who is best equipped to provide flood insurance coverage.

Bill Lesser from FEMA in Washington, DC, noted that many communities have participated proactively in the existing CRS program to accomplish more than the minimum required floodplain management objectives. He mentioned that moving to a state-based or community-based program may require the involvement of state insurance commissioners who could play an important role(s). He discussed, at some length, the challenges associated with setting premiums for structures built before Flood Insurance Rate Maps (pre-FIRMs) were issued. Mr. Lesser suggested that new policy options may help address a range of problems that arise from changes in flood frequency and magnitude of floods. He emphasized that uncertainty should be accounted for in developing a community-based option and that this would require some emphasis on program flexibility. He drew attention to flood insurance pricing and indicated that the ways in which communities chose to assess fees would crucially impact CBFI success or failure. Stakeholder involvement in the design, implementation, and operation of CBFI will be important. Also important will be the identification of appropriate levels of flood loss reductions.

Bill Nechamen from New York State Department of Environmental Conservation, Albany, focused on the importance of accurate flood mapping (Box 2-1). He noted examples in which people tried to influence the drawing of flood maps to minimize their flood insurance premium costs. This practice tends to adversely impact flood insurance rate setting, because flood insurance premiums require accurate data. In addition, he suggested that FEMA be more flexible in designing and enforcing incentives and regulations. He emphasized the importance of flood mitigation, which must be tied to the CBFI option. Finally, he pointed to the adverse effect of “free-riders”—people who fail to purchase flood insurance but are compensated for flood damages in large storms.

Bob Sokolove from Bank of America in Charlotte, NC focused on the potential for large-scale defaults, in which people simply abandoned and/or forfeit their homes and business because the direct and indirect costs of actual and potential flooding become too high. He noted that if two large storms—with magnitudes similar to hurricanes Sandy and Katrina—struck the United States in quick succession, then there would likely be widespread default in ownership of homes and other buildings (Box 2-1). Similarly, sharp rises in flood insurance premiums, if they result in sharp declines in

the value of dwellings or businesses, could lead to widespread defaults. He noted that “green infrastructure” approaches—such as wetland mitigation banking—are examples of novel ways to provide, and perhaps finance, flood protection. He emphasized the importance for all to understand that communities interested in the flood control business should be prepared to do far more than the minimum required.

John Hair from the National Association of Mutual Insurance Companies in Washington, DC, stated that the private insurance industry would likely balk at CBFI for communities that face high risk. He cautioned about practices that entail cross-subsidizing, noting that they may be perceived as unfair and in violation of actuarial principles. The private insurance sector cannot compete with public insurance programs that entail subsidies. He pointed out that some attention should be given to the role of supplementary coverage—privately provided insurance that supplements government-based insurance. He echoed the words of other presenters in noting the importance of integrating insurance with mitigation (Box 2-1).

There is much to learn about CBFI prospects through additional input from the wider private insurance sector. For example, in California several insurers used a commercial loss model that rates fire risk by community, rather than individual structure. Although these types of area maps have been used for years for earthquake risk, their inclusion and increasing sophistication in fire risk is a more recent development. Many of the mitigation issues from a community perspective would be similar for fire and

flood (although not earthquake). However, even for earthquake insurance, the issue of overall community resilience is attracting a lot of attention at the state level, particularly in California. In dealing with communities, insurance organizations use a rating system based on the communities’ building code enforcement. This practice could provide an important learning analogy for CBFI pricing.

An example from the broader flood insurance sector includes large commercial/industrial flood insurance markets. There is a large commercial/industrial flood insurance market where flood insurance coverage is provided by the private insurance sector. The approach to evaluating and rating an industrial complex, as well as how the private insurance sector works with the client on mitigation and other risk reduction has relevance to a CBFI option.

Katherine Greig from the New York City Mayor’s Office stated that effective and comprehensive risk communication is essential to the overall approach to managing flood risk. She noted that the CRS is difficult to apply for in very large and varied communities; therefore, community scale and variety may present several challenges to CBFI. She expressed the view that the issue of low takeup rates probably could only be solved with mandatory flood insurance requirements, which would be politically difficult. She also expressed concern about the possibilities for widespread default.

Vincent Brown from FEMA in Washington, DC, reemphasized the importance of balancing insurance with mitigation. He noted that floods are only one of a number of other natural disasters, such as windstorms and earthquakes. He emphasized the need not only for communicating risk, but also for educating future generations about the nature of natural disasters and for preparing the next generation of flood risk experts and floodplain managers.

PANEL DISCUSSION II: FLOOD INSURANCE, RISK, AND MANAGEMENT FROM THE COMMUNITY PERSPECTIVE

Greig presented the 2007 and 2013 flood insurance rate maps (FIRMs) for New York City to illustrate that floods often go beyond boundaries of the 100-year floodplain. She emphasized the need for effective and ongoing communication about flood risk, noting that preliminary FIRMs are often the best available data. She identified four desirable objectives going forward: (1) reduce risk, (2) improve risk-based pricing, (3) initiate affordability studies, and (4) inform the public.

Brown acknowledged that getting good flood risk information is often difficult to acquire and that it may take several years to update a FIRM.

He emphasized the need to communicate flood risk information early and often, as well as the importance of both insurance and mitigation.

Hair indicated that NAMIC supports the principle of risk-based pricing. He suggested that, to the extent that affordability is an important consideration, the following actions merit further study: performing means testing; augmenting mitigation grants; employing larger deductibles; phasing in rate increases over long periods such as a decade or two, and escrowing insurance payments with mortgage payments.

Sokolove asserted that communities are often reluctant to purchase flood insurance, which impose on them the responsibility for preventing and managing floods. He suggested that flood insurance may fail to achieve the objective of reducing or eliminating disaster assistance because of problems with pricing. Furthermore, many communities lack the capability to mount and execute CBFI because communities are the least capable entities for managing flood insurance. Instead he argued that it would be far better to reform the NFIP, rather than focus on a CBFI option. He emphasized that once a community opted to implement CBFI, it would be very difficult to reverse that decision.

Nechamen also questioned the feasibility of a CBFI option because of a lack of resources at the local level. He recommended that mandatory flood insurance be established for some areas. He stated that there is great uncertainty about what Congress will do when the NFIP expires in 2017. McDonald added that CBFI is just one more option: it will not be applicable in every community, but it should be an option.

The discussion that followed the presentations identified increased resiliency at the community level as an important objective for CBFI. Neverthe-

less, the primary motivator of interest in CBFI appears to be the possibility of lower flood insurance premium rates. Some communities are interested in CBFI to increase resiliency through mitigation and to have more widespread insurance coverage.

Box 2-2 highlights the main topics that emerged from this second panel discussion. The discussion also revealed concern about (1) flood damages, and the costs to mitigate and insure against them, are certain to grow; (2) the ability of the federal government to defray these increased costs is in question; and (3) other means to raise the needed revenue are not immediately evident.