A Community-Based Flood Insurance Option (2015) / Chapter Skim
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option -- that is a single insurance policy for an entire community. Section 23 of the HFIAA 2014 legislation asked FEMA to evaluate the prospects for CBFI. To satisfy this congressional request, FEMA asked the National Research Council (NRC) to convene an expert committee on a CBFI option (see Statement of Task in Box 1-1, Chapter 1)
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For example, one method could be to distribute premium cost according to each individual's assessed flood risk. The community could purchase the insurance, and premiums could be collected using mechanisms such as property taxes or utility charges.
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Although there is no present CBFI option, communities can participate in the NFIP in several ways. Communities play a substantial role in flood risk management and they often qualify for or receive federal resources to undertake mitigation.
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The Coase Theorem, developed in the economics field, holds that where parties -- both individuals and groups -- account for all costs and benefits, markets are functional, information is freely and widely available, transactions costs are zero, and economically efficient outcomes are reached irrespective of with whom the property rights are vested. If the collective economic interests of communities and residents fully coincide and are fully accounted for, the outcomes of a flood insurance purchase decision do not rely upon which party -- communities or residents -- bears responsibility for insurance.
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Under certain circumstances, however, CBFI may be difficult to implement, for example when a community is not interested or lacks the capability to implement CBFI. Successful implementation would likely require communities to enact some land use restrictions, adopt complementary flood risk management measures and raise additional revenue to pay CBFI premiums.
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A CBFI option may provide an opportunity to reconsider flood exposure. • Underwriting, Pricing, and Allocation of Premium Costs Several complex issues fall under this topic: the extent of actuarial principles to be used in setting premiums (NFIP premiums are leg islatively and administratively constrained; see NRC, 2015)
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If the NFIP were to assume the risk of community based policies, then presumably it would also assume the function of pricing these policies to account for the savings expected from mitigation measures. FEMA has expertise in setting premium costs based on flood risk, and would have to work with communities to communicate individual property coverage costs bundled into a community policy.
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