Affordability of National Flood Insurance Program Premiums Report 1 (2015) / Chapter Skim
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3 National Flood Insurance Pricing, Policies, and Premiums
3 National Flood Insurance Pricing, Policies, and Premiums
Pages 35-50
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From page 35... ...
NATIONAL FLOOD INSURANCE PROGRAM PRICING AND POLICY TYPES Actuarial Pricing Principles Insurance requires individuals to pay premiums that are greater than the expected loss (the product of probability multiplied by the amount of 1 The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014) changed some provisions of Biggert-Waters 2012.
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From page 36... ...
In fact, the Federal Emergency Management Agency (FEMA) publishes an annual report called the Actuarial Rate Review that documents NFIP pricing practices (see Box 3-1 for additional discussion of the setting of premiums in the NFIP)
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From page 37... ...
Then, using the flood insurance rate map (FIRM) , the agent can calculate the difference between the lowest floor and the Base Flood Elevation (BFE)
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From page 38... ...
. National Flood Insurance Program Policy Types National Flood Insurance Program Risk-based Premiums FEMA defines a risk-based premium as one "charged to a group of policies that results in aggregate premiums sufficient to pay anticipated losses and expenses for that group."2 That definition calls for actuarial principles that the rates reflect expected losses and other costs of risk transfer and that there not be cross-subsidies across the risk groups.
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From page 39... ...
Preferred Risk Policies For policies outside the 100-year and 500-year floodplains, FEMA has two rate classes: X zone rates and preferred risk policy (PRP) rates.3 X zone rates follow a process similar to that for full risk-rated properties in the SFHA as discussed above.
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From page 40... ...
When, on the number and variability of claims, the NFIP's historical damage data is sufficiently credible, the NFIP data is used X zone (no grandfathering is allowed; see below) and have favorable loss history.
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From page 41... ...
That is done by using this formula: Max LADJ × DED × UINS Rate = ∑ (PELVi × DELVi ) × i =Min EXLOSS where LADJ is a load factor that reflects damage adjustment expenses, and DED is a load factor that can be thought of as adjusting the DELV to account for the deductible amount (because the damage actually paid by the NFIP reflects the deductible amount)
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From page 42... ...
was required to be eligible for pre-FIRM subsidized rates. Offering rates below risk-based levels violates actuarial principles.
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From page 43... ...
Here, the zone-grandfathered policies going from non-SFHA to SFHA do not pay the lower non-SFHA preferred risk policy (PRP) rate but instead pay an average rate, called the X zone standard rate for policies outside SFHAs but without the favorable loss history of the PRPs.
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From page 44... ...
The WYO allowance, as a percentage of written premiums, is roughly 6 There are some useful community-based actions for which FEMA allows for lower rates, even though they will not necessarily reduce claims from existing properties. For example, publishing flood risk rate maps in a local library may increase general flood risk awareness in the community, but it may not lead directly to reductions in claims by policy holders.
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From page 45... ...
In effect, they applied actuarial pricing principles more fully. Remove Pre-Flood Insurance Rate Map Subsidized Rates To be consistent with actuarial principles, FEMA was to replace preFIRM subsidized rates with NFIP risk-based rates.
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From page 46... ...
National Flood Insurance Program Risk-Based Rates To be consistent with actuarial principles, sections of BW 2012 directed FEMA to review the basis on which it was setting NFIP risk-based rates, with specific attention to ensuring that catastrophic-loss years would be fully incorporated into the NFIP calculation of the HALY. The HALY concept, however, was developed to accommodate the premium revenue loss
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From page 47... ...
BW 2012 implicitly rejected that historical attention to reasonableness when setting rates: all rates were to be changed, and as a result increased, to better reflect actuarial principles. BW 2012 acknowledged a concern about the affordability of premiums when it called for an affordability report and study in Section 100236 (Appendix A)
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From page 48... ...
HFIAA 2014 was clear that any assistance should be offered in consideration of a policyholder's income or wealth; Section 9 called for "targeted assistance to flood insurance policy holders based on their financial ability to continue to participate in the National Flood Insurance Program." SUMMARY Restrictions that prevented the NFIP program from strictly following actuarial principles before passage of BW 2012 were aimed at achieving the NFIP goal of reasonably priced premiums. The rising NFIP debt stimulated congressional reform legislation that focused in part on whether NFIP premium setting practices were applying actuarial principles.
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From page 49... ...
The increase in cost of insurance for policyholders as a result of phasing out pre-FIRM subsidized premiums and the resulting premium revenue increases to the program, may be significant, but can be estimated only when additional data is available. • HFIAA 2014 delayed but did not reverse the BW 2012 requirement to eliminate pre-FIRM subsided rates and to consider changes to NFIP risk-based rate setting practices.
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