Affordability of National Flood Insurance Program Premiums Report 2 (2016) / Chapter Skim
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4 Analytical Next Steps and Further Findings for Affordability Policy Options
4 Analytical Next Steps and Further Findings for Affordability Policy Options
Pages 67-88
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From page 67... ...
premiums would result in a cost burden on policyholders, decisions that must be made by policy makers when designing an assistance program, and policy options for delivering assistance or for reducing premiums for all policyholders. In this report -- Report 2 -- the task was to propose alternative approaches for evaluating affordability policy options.
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From page 68... ...
For example, some of the options discussed in Report 1, such as disaster savings accounts, tax credits and deductions, and capping the NFIP responsibility to pay claims in high-loss years, might be put aside as viable near-term alternatives if the alternative would have little applicability to low-income property owners, if the alternative would require specialized legislation and execution by another agency, or if FEMA concluded that the alternative would have limited political acceptability. Third, after this initial screening, some alternatives will remain candidates for inclusion in an affordability framework and, by Section 100236 of the Biggert-Waters Flood Insurance Reform Act of 2012 (BW 2012)
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From page 69... ...
In fact, the North Carolina proofof-concept pilot analysis illustrates that computational modules can be built to determine premiums, predict future claims, and make estimates of NFIP net revenues for a limited range of alternative policy options. Based on the North Carolina analysis, FEMA could begin the conceptual development of a microsimulation framework that represents the operation of the NFIP and that can be ready to evaluate affordability policy options as data gaps are filled (see Chapter 3)
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From page 70... ...
For example, the costs of simply designed premium and mitigation grant assistance programs within North Carolina were estimated. More complex program designs could be formulated and evaluated for North Carolina.4 Depending on study resources and schedule, the socioeconomic data gaps that now exist in North Carolina might be filled with a sample survey of flood-prone property owners in that state.
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From page 71... ...
Such an analysis could examine, for example, how the number of property holders eligible for assistance and the amount of assistance that they receive varies when different percentage thresholds (for premium to property value) are used to identify who is cost burdened.5 The results of any North Carolina analysis can be realized quickly and can make an important contri bution to the design of an affordability framework.
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From page 72... ...
National Flood Insurance Pricing, Policies, and Premiums Grandfathering Grandfathered properties are those that were built in compliance with the flood hazard map in effect at the time of building construction, and the properties are allowed to maintain a lower flood insurance premium rate if a new map moves the property into a higher flood-risk zone or new base flood elevation. These policyholders would face increases if, as BW 2012 specified, grandfathering was no longer available and NFIP risk-based rates were to be paid.
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From page 73... ...
Looking ahead, climate change, land development, and improved flood mapping mean that, in the future, some properties will be mapped into SFHAs when they are not currently, or will see higher base flood elevations. The owners of those properties will have the opportunity to pay grandfathered rates under HFIAA 2014 (in addition to those paying grandfathered rates prior to HFIAA 2014)
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From page 74... ...
Digital flood insurance rate maps, however, have emphasized not only defining the boundaries of the SFHA, but also mapping risk zones within the SFHA. Delineating risk across the floodplain would enable FEMA to provide better information for local zoning and minimize possible neglect or misunderstanding of risk by property owners.
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From page 75... ...
If the goal is to expand the number of policies in force both within and outside the SFHA, providing assistance may encourage voluntary purchase when the insurance premium exceeds a household's ability to pay, using some chosen criterion for defining cost burden.11 Finding 4.4. In designing an assistance program and considering the goal of increased flood insurance takeup, aid may need to be extended to property owners who are not required to purchase flood insurance.
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From page 76... ...
Calculating and then informing policyholders of the NFIP risk-based rate may help address the direction of Congress that policy holders be provided with accurate information on the flood risks they face. Affordability Concepts and a Framework for Assistance Program Design Decisions The Ability to Pay Flood Insurance Premiums BW 2012, Section 100236, states that FEMA
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From page 77... ...
This focus on ability to pay requires FEMA to define when such premiums impose a cost burden on an individual. The ability of a property owner to bear a particular cost, such as a flood insurance premium, is often described in terms of some measure of household gross or net income.
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From page 78... ...
Defining Cost Burden for Assistance Program Design Report 1 noted that there were many possible measures of cost burden and discussed three specific measures, two of which were related to an individual's income. Specifically, Report 1 discussed an income approach and a housing cost as percent of income approach to identify those who would be cost burdened by their NFIP premiums.
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From page 79... ...
Using the criterion of 1.0 percent of total value of coverage for determining whether the household is cost burdened, the capped premium would be $1,000 and, if assistance is provided to eliminate the entire cost burden, the amount of assistance provided to this household would be between $3,000 and $1,000, or $2,000. A property owner's income or wealth characteristics do not enter into this calculation.
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From page 80... ...
The premium cap for $250,000 coverage is now 0.67 percent times $800,000, or $5,360. This property owner is not considered to be cost burdened and would receive no assistance.21 A principal advantage of this approach is that data on property values 18 HFIAA, Sec.
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From page 81... ...
Finding 4.7. For the purpose of implementing an assistance program, policy makers will decide whether they want to define cost burden with reference to income, housing costs in relation to income, premium paid in relation to property value, or some other measure.
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From page 82... ...
Annual premium is • urden on households B • oes not account for income D unaffordable if it and administrative cost and thus may not fully reflect exceeds a specified to FEMA are low as ability to pay. percentage of assessed assessed property value • ssessments can be many A real property value.
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From page 83... ...
One option would be to cap rates at a level less than NFIP risk-based rates for all properties that had pre-FIRM subsidized rates and also allow that cap on the premium to transfer with the property to all future owners, without regard to the future owners' a bility to pay. On the other hand, if a property owner was allowed to pay a reduced annual premium, but not transfer that reduced premium to the next owner upon sale of the property, the value of the property will be reduced by the capitalized value of the increase in future NFIP premiums, as though the premium reduction had never occurred.
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From page 84... ...
A policy decision to compensate for some amount of property value loss may require significant public expenditure. Cost Burden and Multifamily Properties Multifamily rental apartments are a business and premiums for the building are paid by the property owner (landlord)
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From page 85... ...
The assistance offered could be a combination of a mitigation grant, plus access to a loan with a commitment to an amount of assistance that would be used to make the annual loan payments and premium payment assistance for any remaining (after mitigation) cost burden imposed by paying the NFIP risk-based insurance premium.
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From page 86... ...
Linking mitigation with premium assistance can lead to property owners having a cost-effective combination of mitigation and insurance coverage. Identifying that combination, however, requires complex calculations and the roles and responsibilities of FEMA in assisting with that calculation need to be assessed and, potentially, enhanced.
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From page 87... ...
Finding 4.7. For the purpose of implementing an assistance program, policy makers will decide whether they want to define cost burden with reference to income, housing costs in relation to income, premium paid in relation to property value, or some other measure.
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From page 88... ...
Individual NFIP policyholders will bear location cost in the form of insurance premiums paid and damages falling within policy deductible amounts. The federal taxpayer might bear floodplain location costs if the federal treasury develops a premium assistance program, makes up for NFIP premium revenue shortfalls, or makes post-flood disaster assistance payments to individual households.
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