Affordability of National Flood Insurance Program Premiums Report 2 (2016) / Chapter Skim
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2 An Approach to Policy Evaluation for the National Flood Insurance Program
2 An Approach to Policy Evaluation for the National Flood Insurance Program
Pages 21-48
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From page 21... ...
It has three major sections: elements of a planning process; a discussion of policy modeling, including microsimulation; and an illustrative application of a planning process to evaluate affordability policy options. ELEMENTS OF A PLANNING PROCESS TO EVALUATE AND COMPARE NFIP POLICY OPTIONS A structured planning process for conducting the congressionally required affordability study can be organized around a suite of interrelated evaluation elements (Deason et al., 2010; Stokey and Zeckhauser, 1978)
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From page 22... ...
For example, a what-if question would be the following: For how many policyholders would a particular assistance program eliminate the cost burden of NFIP risk-based premiums under full implementation of BW 2012? In the NFIP context, these could include the number and percent of policyholders who are cost burdened by their NFIP premiums using different measures of cost burden selected by policymakers for comparison.
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From page 23... ...
. Models can be ad hoc -- developed for one-time use, often "on the fly" -- or they can be formal -- developed for longer-term use for repeated evaluations of alternative policy options as they emerge in an area and, hence, requiring extensive documentation of assumptions, inputs, outputs, and modeling processes.
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From page 24... ...
In considering modeling options, FEMA could view its congressional directive -- that is to conduct a study on how BW 2012 would affect the afford bility of flood insurance premiums -- as limited to requiring the devel a opment of one or more ad hoc models for estimating costs and benefits of specific affordability policy options. However, if FEMA views its Congressional request in the context of a long history of requests for different kinds
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From page 25... ...
to select for investment given the kinds of policy questions it is likely to be asked. FEMA's modeling needs for NFIP premium affordability study require the ability to estimate yet-to-be developed policy options, singly and in combination, that could affect NFIP premium revenues and the affordability of premiums for current individual policyholders and groups of policyholders (defined, for example, by income or wealth, geographic area, and other characteristics)
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From page 26... ...
This combination of analytical requirements leads to consideration of microsimulation techniques for assessing NFIP policy options, including options for providing affordability assistance. Regarding this choice, the committee began with the reality that the e ffects of BW 2012 (and other legislation and policies)
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From page 27... ...
For each property in the database, the computer simulation program would use location information, property characteristics, and preferred coverage to simulate premiums to be paid under a baseline and a proposed alternative policy option. Information on the assistance program design features, the property, and the property owner will allow the computer program to simulate whether the property owner is eligible for assistance (and the amount of assistance)
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From page 28... ...
Subsequently, a behavioral response module could be developed that simulates whether a current policyholder increases, decreases, or drops coverage and whether a potential policyholder takes up coverage on a previously uncovered property in response to a change in the premium, considering the current or potential policyholder's income and other characteristics.4 Although the first-generation NFIP microsimulation model might not simulate behavioral responses, it would certainly need a module that estimates a property's flood risk based on the property's characteristics, as well as a module that estimates the flood insurance premium based on the NFIP 3 Output from the microsimulation program could include, for example, premium revenues and the percentage of policyholders who are cost burdened by their NFIP premiums, for not only the entire NFIP, but also the subgroup of policyholders who lost pre-FIRM subsidies due to BW 2012. These outcomes would be estimated under both the baseline condition and the alternative policy option under consideration.
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From page 29... ...
Of course, the reform options of most immediate interest to FEMA are affordability assistance programs, such as a program that provides premium assistance to policyholders who are cost burdened by NFIP riskbased premiums. If the assistance is paid from general federal revenues, the 5 The analysis called for by BW 2012 is pushing the NFIP rate-setting practice toward "full risk" premiums on all insured properties.
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From page 30... ...
For example, it could be necessary to simulate how a particular mitigation activity lowers flood risk and, thereby, the flood insurance premium (Box 2-3)
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From page 31... ...
Building microsimulation models, however, which are necessarily complex to reflect the complexities of government programs and individual circumstances, requires substantial time and resources. There are recognized practices for an agency looking to develop a simulation model to address its needs for evaluating various policy options (NRC, 1991; OASPE, 2012, and the references on pp.
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From page 32... ...
MICROSIMULATION MODELING FOR THE NFIP The purpose of this section is to illustrate how the evaluation elements might be implemented in a FEMA evaluation of affordability policy options. It is illustrative and not meant to be a recommendation for how BOX 2-4 North Carolina Proof-of-Concept Pilot Analysis The North Carolina Floodplain Mapping Program (NCFMP)
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From page 33... ...
Other examples include methods for calculating building-level flood damages, mitigation costs, and flood insurance premiums. NCFMP uses these advanced datasets and tools to support management of all regulatory and nonregulatory flood hazards and other risk management data in a database-derived, digital display environment.
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From page 34... ...
These metrics will then serve as the basis for estimating the effects of each alternative option relative to the baseline and for comparing the alternatives against each other according to the policy objectives embodied in the metrics. Making reference to Table 2-1 and keeping the provisions of BW 2012 including Section 100236 in mind, one possible set of questions following from Report 1 might be the following: • Does an assistance program reduce the number of policyholders who are cost burdened and the degree to which they are cost burdened (relative to BW 2012)
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From page 35... ...
• ow would a particular premium assistance program H affect takeup rates and, thus, compliance with mandatory purchase requirements among those who are required to purchase flood insurance? • ow would a particular mitigation assistance H program affect property values?
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From page 36... ...
. Specify Future Baseline Conditions Analysis of flood insurance affordability policy options would define a baseline that can be used to evaluate the effect of alternative affordability policy options.
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From page 37... ...
Number and percentage of current policyholders who would lose grandfathered rates who will become cost burdened. Number of property owners in 500-year floodplains, who do not have a policy, and for whom purchase of an NFIP risk-based policy will create a cost burden.
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From page 38... ...
. Other examples of different baseline conditions include projections of changes in population density in flood-prone areas, price and extent of private-sector flood insurance offerings, and effects of changes in flood risk related to climate change.
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From page 39... ...
In a policy simulation, the best metric for representing community resilience may simply be the takeup rate (expressed as a percent of properties) of flood insurance.
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From page 40... ...
The choice of future baseline conditions is a judgment for the analysts and may play an important role in analyzing alternative policy options for addressing affordability issues.9 9 Given that projections will be highly speculative, FEMA analysts may want to consider more than one baseline, with a "base baseline" being no change and one or more alternative baselines allowing for changes (e.g., in the takeup rate)
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From page 41... ...
. Formulate Alternative Policy Options Report 1 (Chapter 6)
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From page 42... ...
As one example, an alternative option might be limited Affordability to allowing flood insurance premiums to be included as a federal income tax deduction, based on specified Options the taxpayer. As another Policy conditions of example, a cash assistance program (whether for premiums or mitigation)
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From page 43... ...
In the North Carolina study, the available data used to define cost burden were values of the ratio of flood insurance premium to insurance coverage expressed as a percent, and values greater than 1 percent were defined as cost burdensome. This cost-burden measure was chosen because policyholder income and annual housing costs were not available; however, the committee does not recommend this as a measure of cost burden.
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From page 44... ...
and how much revenue would be provided by the treasury to the NFIP. Compare and Display Effects of Alternative Policy Options The estimated effects of an alternative policy option (e.g., an affordability assistance program)
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From page 45... ...
EXAMPLE 1. How cost burdened are policyholders by their flood insurance premiums? Number and Percent of Policies Severity of Cost Burden Baseline Alternative Policy Option Not cost burdened Cost burdened Severely cost burdened Total EXAMPLE 2: Does NFIP pricing follow actuarial principles regarding net revenues and cross-subsidization?
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From page 46... ...
Alternative Provide premium assistance or Premium assistance is a payment equal Policy Option: mitigation assistance grant to to the difference between the NFIP Premium or those policyholders who meet risk-based rate and the previous premitigation two eligibility criteria: FIRM subsidized or grandfathered rate assistance 1. FIP risk-based premium N if a policyholder is eligible. will exceed 1 percent of Mitigation assistance grant is amount flood insurance coverage.
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From page 47... ...
FEMA's capability to evaluate affordability policy op tions is very limited but can be substantially advanced by embracing a microsimulation modeling approach and building the model incremen tally through time. This would begin with conceptual microsimulation model design and the writing of computational algorithms for the self contained modules, as necessary data are identified and data gaps filled.
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