Affordability of National Flood Insurance Program Premiums Report 1 (2015) / Chapter Skim
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7 Policy Alternatives for an Affordability Strategy
7 Policy Alternatives for an Affordability Strategy
Pages 99-118
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From page 99... ...
• Community-based programs. DIRECT FINANCIAL ASSISTANCE TO POLICYHOLDERS Assistance policies for individual policyholders can be related to implementing mitigation measures that lower premiums, directly subsidizing the annual cost of flood insurance premiums, or a combination of the two.
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From page 100... ...
Targeted Mitigation Grants Even if mitigation could be implemented by policyholders to reduce premiums, the cost of such actions may be a barrier to their adoption. Existing mitigation grant programs, paid for from general federal revenues, might be modified to overcome that barrier.
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From page 101... ...
Reforms to target funds toward securing NFIP premium affordability for cost burdened households may be necessary. Three ways of reforming mitigation grant programs to address affordability can be identified.
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From page 102... ...
. Mitigation Loans Mitigation measures can have significant initial costs, but any reductions in annual NFIP premiums will occur later.
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From page 103... ...
The NFIP premium would fall to $500 and the total annual cost for managing the household's flood risk would fall from $4,000 for the NFIP premium to $2,180 -- $500 for the NFIP premium plus $1,680 for the mitigation loan.5 The household may be able to afford the $2,180 annual payment but not the $4,000 annual premium.6 Although a loan might appear to make financial sense, a low-income household may not have access to a private commercial loan. Funds might therefore be allocated to a federally backed loan program that is targeted to households that have little access to commercial credit.
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From page 104... ...
A 2014 study proposed using vouchers to cover both mitigation and insurance costs. It was concluded that such a program would probably be financially more attractive to both the property owner and the federal government than a voucher program that covered only the insurance cost, because the mitigation measures would lead to permanent reductions in expected NFIP payouts and hence lower insurance premiums (Kousky and Kunreuther, 2014)
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From page 105... ...
. A credit is independent of the tax bracket but benefits only those who owe taxes unless it is in the form of refundable tax credits, whereby a refund is given if the filer owes less tax than the credit.
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From page 106... ...
To date, neither of these bills has been passed.9 Disaster Savings Accounts Another disaster assistance option is a tax deductible disaster savings account. Pre-tax funds placed in such an account could be used to cover disaster damages, hazard mitigation investments and/or flood insurance premiums.
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From page 107... ...
agent advisory role, reducing loadings for administrative costs, and eliminating mandatory purchase. Expanding the Variety of Individual Mitigation Measures That Reduce Premiums If mitigation actions11 lead to lower damages and lower expected implement them.12 However, at the household level, there are only a few claims, they could make NFIP policies less expensive for households that mitigation actions that might result in lower NFIP premiums.
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From page 108... ...
One challenge for FEMA and the NFIP will be to determine whether shallow water flooding is the reason for the modest claims and, if so, to reflect lowcost retrofitting approaches in the rating tables for homes where shallow water flooding is likely. For a broader set of mitigation measures, including shallow water flooding, to be considered in setting premiums, FEMA would need to develop data and analyses that would link the measures' expected reduction in losses to insurance premiums.
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From page 109... ...
Encouraging Selection of Higher Insurance Deductibles As a general matter insurance premiums can be lowered if the purchaser chooses a higher deductible. In the case of flood insurance, the NFIP offered deductibles to homeowners that prior to BW 2012 ranged from $500 to $5,000.
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From page 110... ...
Specifically, Congress could explicitly state that when total annual losses in the program exceed some designated threshold (as an illustration, $2 to $6 billion, perhaps on the basis of the average of noncatastrophic historical claims years) , the Treasury will provide funds to allow the NFIP to honor all the claims.
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From page 111... ...
Reducing National Flood Insurance Premium Administrative Cost Loadings in Premiums The NFIP pays a portion of premium revenue to the WYO insurance companies to compensate them for writing policies, collecting premiums, and settling, paying, and defending claims. Reducing administrative costs could help lower premiums across the board but determining the effects of this option requires an understanding of the fees paid to WYO companies.
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From page 112... ...
To determine how much insurers receive for expenses, the NFIP calculates a 5-year industry average of multiple property insurance lines and then adds an extra 1% to cover additional expenses for participating in a federal program. Although the NFIP could potentially collect actual expense data from the approximately 85 WYO companies, the administrative cost of such data collection is nontrivial, and it is unclear how large the savings would be.
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From page 113... ...
Some community-level mitigation measures can lead to lower NFIP premiums through modifications to FIRMs or through the Community Rating System (CRS) , discussed below.
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From page 114... ...
This effort demonstrates a commitment by FEMA to encourage self-initiated efforts in conjunction with their more prescribed CRS approach. The Community Rating System The CRS offers premium reductions for "community floodplain management activities that exceed the minimum NFIP requirements" to "reduce flood damage to insurable property, strengthen and support the insurance aspects of the NFIP and encourage a comprehensive approach to floodplain management" (FEMA, 2015)
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From page 115... ...
That said, risk-based premiums could be coupled to premium reductions when communities or individuals engage in flood risk management activities that lead to higher adoption of flood mitigation measures. If the reduction in premiums incentivized greater adoption of hazard mitigation at a community level, such as encouraging communities to move up through the CRS program discussed in the previous section, it would translate into lower insurance costs for all residents -- but again the reduction in premiums may not be sufficient
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From page 116... ...
• The few mitigation measures that result in lower NFIP premiums tend to be expensive, such as elevating homes. As a result of BW 2012, FEMA will consider whether lower-cost mitigation of struc tures will result in lower premiums.
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From page 117... ...
These include reducing administrative fees, disaster savings accounts, and income tax credits and deductions. • Community measures can lower insurance premiums through miti gation actions that benefit clusters of structures and through the CRS.
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