A Community-Based Flood Insurance Option (2015) / Chapter Skim
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3 Flood Risk Management and a Precedent for a Community-Based Flood Insurance Option
3 Flood Risk Management and a Precedent for a Community-Based Flood Insurance Option
Pages 23-44
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From page 23... ...
There are, however, several programs and opportunities for community-level1 participation in broader flood risk management, including those through the NFIP. This chapter describes risk management and how it specifically applies to floods; already existing opportunities for community-level participation as the precedent for community-based options; and key flood insurance topics that include participation and flood insurance takeup rates, community involvement, communication of flood risk, flood insurance premium pricing, and socioeconomic factors.
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From page 24... ...
Finally, insurance can be used to transfer flood risk by which a property owner would be partially or fully indemnified for any flood losses by whatever entity or entities that provide the insurance (e.g., the NFIP, private insurance companies)
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, the Cooperating Technical Partners Program, and the Flood Mitigation Assistance Program. Flood Risk and Floodplain Management Comprehensive flood risk management is a shared responsibility carried out at various levels, from the federal government to the individual.
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From page 26... ...
Furthermore, the study showed that when mitigation is integrated into comprehensive plans, communities are more likely to adopt and implement regulatory policies aimed at mitigation. Community Rating System The Community Rating System is an incentive-based, voluntary program for NFIP communities, with the objective of reducing flood risk.2 FEMA implemented the CRS in 1990 as an incentive to communities to adopt more rigorous floodplain management strategies and increase flood awareness (FEMA, 2014a)
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From page 27... ...
The premium reductions must be absorbed in the flood insurance policies administered elsewhere. Other benefits to the community include reduced flood risk through mitigation measures such as elevating structures above base flood elevation and retaining floodplain landscapes (Asche, 2014)
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From page 28... ...
. FLOOD INSURANCE -- KEY TOPICS This section discusses several key flood insurance topics within the NFIP: participating communities, policyholder participation and takeup rates, community involvement, communicating flood risk, flood insurance premium pricing, and some socioeconomic factors.
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The following NFIP-participating community data summary is based upon the 2012 NFIP policy database provided to the Wharton Risk Management Center. For the year 2012, within the 50 states, a total of 18,391 NFIP communities were identified from this database encompassing 5.4 million total policies-in-force with $1.25 trillion in insured coverage (building and content)
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From page 30... ...
30 TABLE 3-1 Average Policies-In-Force, Flood Insurance Coverage for Buildings and Contents, and Earned Premiums of NFIP Participating Communities in Both Coastal and Non-Coastal States Number of NFIP Average Average Total Average Total Average Total Communities Policies-in-force Building Coverage Content Coverage Earned Premium Coastal State 8,076 601 $ 114,557,556 $ 27,531,624 $ 377,209 Non-Coastal State 10,315 55 $ 8,243,244 $ 1,873,052 $ 42,743 Total U.S. 18,391 295 $ 54,928,818 $ 13,140,445 $ 189,616 SOURCE: 2012 NFIP policy database.
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From page 31... ...
Figure 3-1 illustrates the complete distribution of the number of policies-in-force in each community split by coastal and non-coastal states. Both community policies-in-force distributions are skewed implying nonsymmetry in participating community "size," and thus making it more difficult to determine a typical average community size value as discussed above.
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From page 32... ...
Thus, it is not a simple matter to define an average NFIP community, suggesting it may be complex to develop a one-size-fits-all community-based approach to flood insurance. Policyholder Participation and Takeup Rates During the early 1970s, only 95,000 NFIP policies were in place.
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From page 33... ...
Hence, for any policy option intended to increase takeup rates, it would be useful to assess how a CBFI option might affect program objectives and whether tradeoffs are involved. Community Involvement in Flood Insurance Local governments are typically involved in flood mitigation activities such as designing and building structures for flood damage mitigation; enacting and enforcing floodplain management regulations; establishing and operating flood warning systems and emergency management plans; and regulating land development in upland areas to reduce the extent to which new impervious surfaces on these lands will increase flooding downstream.
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From page 34... ...
The same can be said for communities that can undertake measures to better manage their floodplains and mitigate flood hazards. The NFIP through its mapping, floodplain management and insurance activities has spent considerable resources to communicate flood risk.
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Issues that arise from the NFIP's approach to pricing flood insurance include, but are not limited to, financial deficits, distorted incentives with respect to flood risk management, and adverse selection. These pricing topics are discussed below.
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The more that someone pays for insurance that is tied to the risk of loss, the more he or she will be induced to take steps to reduce the risk of loss or cancel the policy. Individuals and households can control or influence their exposure to flood risk primarily through their decisions about the location of the homes
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From page 37... ...
If property owners, which have a subsidized flood insurance policy, pay less than what they would pay if there policy was not subsidized, there is less incentive to mitigate against flood loss. As discussed above, there are three primary groups of polices or properties that are currently charged less than what FEMA considers to be full-risk premiums -- pre-FIRM subsidized policies, grandfathered policies, and policies that receive CRS discounts.
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From page 38... ...
This is a problem for two reasons: (1) given that owners of moderate- and low-risk properties still have some flood exposure if they choose not to buy flood insurance, then they risk incurring uninsured flood losses; and (2)
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From page 39... ...
These modest to less than modest takeup rates can potentially be explained by property owners deliberatively evaluating premiums and deductibles for various flood insurance policies against the probability and severity of flood losses (NRC, 2015) , and rationally choosing to purchase little or no flood insurance within this cost/benefit, decision-making context.
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From page 40... ...
These low market penetration issues are further compounded by expectations of disaster relief, whereby property owners in high flood risk areas have not taken steps to reduce their exposure or have adequate insurance in place because they assume they will be compensated if a disaster occurs (Kunreuther and Michel-Kerjan, 2013a)
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From page 41... ...
, which may encourage the protection of vulnerable areas. Finally, community socioeconomic factors are not limited to impacts on private property owners within a community.
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From page 42... ...
The CRS uses a class rating system and for each improvement in class, a discount is offered on flood insurance to individual policyholders. Other examples of community participation in the NFIP include flood risk and floodplain management, the Cooperating Technical Partners Program and Risk Map, and the Flood Mitigation Assistance Program.
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From page 43... ...
FEMA has spent considerable effort, with measurable success, in communicating flood risk at the individual and community levels. • Flood Insurance Pricing.
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