National Flood Insurance Program

FEMA has taken actions to address the problem: of RLPs (3

1. Reconstruct/ elevate or flood-proof substantially damaged structures to prevent future damage. 2. Phasing out premium subsidies to RLPs 3. Provide data to communities to help them address RLPs

Under NFIP, the government became a de factor regulator of economic activity in flood prone areas. The economic regulation is accomplished in two ways:

Flood insurance may be required as a condition of obtaining a federally secured mortgage loan, for buildings located in SFHAs Managerial regulation, where the government provided subsidized flood insurance in communities that took steps to regulate the flood plain through land use zoning ordinances and building standards

There are some things to keep in mind about NFIP financial solvency, (2

NFIP was not capitalized at inception NFIP does not operate under the traditional definition of solvency that requires it to have statutory reserves in order to sell insurance

The Federal Emergency Management Agency (FEMA), a division of the Department of Homeland Security (DHS) administers the program: (3

- Develops flood hazard maps used to set insurance rates - Regulates floodplain development - Informs those who live in the 100-year floodplain of the potential flood hazards

Since Hurricane Sandy, there has been increasing policymaker attention on (4

- Effectiveness of the exiting national program for floodplain management in reducing losses from weather related coastal hazards - Aging coastal protection infrastructure & increasing vulnerability to storm impacts - Low participation in the National Flood Insurance Program (NFIP) - Increasing cost of flooding to the taxpayers

Issues of Contention The challenge for policymakers is to derive the best strategy to: (2

1. Reduce the long term exposure to flood losses, while 2. Maintaining the program's solvency & mandate to provide affordable flood insurance to the public

There are concerns that storms of Sandy's strengths will occur more frequently. This raises policy concerns/ questions: (5

- Is federal flood insurance that complements land use management still an appropriate method to manage flood risk? Does it distribute the burden effectively between the insured and the general public - Is flood risk possible for the private market to underwrite? - Could flood risk be effectively transferred to the private sector (via reinsurance) or the capital markets (via catastrophe bonds) - Should the NFIP debt to the Treasury be forgiven - Are the consequences of flood risk and the level of protection offered by hurricane protection systems effectively communicated to the public?

NFIP Flood insurance is considered to be uninsurable in the private market

- Only the people with the highest risk levels tend to purchase coverage - Possibility of catastrophic losses - Difficult to accurately price the risk due to limitations in hazard assessment - Because the risk of losses among the insureds are not independent, a very high risk load is required. This would drive up the premiums to such high levels that few will be willing to purchase coverage

Phasing out premium subsidies to RLPs (2

-voluntary buyouts -charging full actuarial rates to owners who do not accept FEMA's offer to mitigate the impact of flood damage

Economic Regulation and Recovery from Flood Disasters (4

1 Do economic markets provide a sufficient amount of insurance against flood hazards? 2 Are the insuring firms (that cover flood) sufficiently capitalized so that widespread insolvency would not occur? 3 Would federal disaster insurance crowd out the private market and create unintended liabilities for taxpayers? 4 Would insurers cherry pick the most appealing risks, leaving the unprofitable business for the government?

Assessing the NFIP

1 Extreme weather events and coastal flooding: experts believe that storm impacts will intensify as sea levels rise 2 Accurate Flood Risk Maps: designed to increase public awareness to help people make better decisions 3 Financial Sustainability of the NFIP: charging full actuarial rates will make the policies less affordable 4 Residual Flood Risk from Levees: the existing regulatory framework for residual risk behind a certified 100 year levee has created a perceived safety zone that encourages development behind the levee system, although risk still exists 5 Distributional Effects of the NFIP: there is a perception of inequitable distribution of NFIP's costs and benefits across income groups and geographic regions

FEMA's responsibilities include: (3

1 Identifying areas of special flood, mudslide or flood related erosion hazards 2 Completing a Flood Insurance Study (FIS) 3 Issuing a Flood Insurance Risk Map (FIRM) that indicates risk premium rate zones

Low NFIP Program Participation (5

1 The insurance is seen as not being worth the cost 2 People have misperceptions about low probability risks and lack information about the NFIP 3 Private insurance agents do not market the NFIP 4 There is a lack of compliance with the mandatory purchase requirement; or the owners do not maintain the coverage for the life of the loan 5 Homeowners in the risky areas may not have a mortgage, or have a mortgage from a lender that does not enforce the requirement

The above objectives raise several questions

1. How can FEMA balance actuarial rates and affordability? 2. How to reduce the escalating cost of flooding (and need for taxpayer financed disaster assistance)? 3. How to motivate property owners to purchase insurance protection, and encourage the local governments to make land use adjustments to restrict development in high risk flood zones? 4. How can the private sector's role be expanded in assuming NFIP flood risk?

Options for Managing and Financing Flood Risk

1. Long Term Flood Insurance Contracts (LTFIC 2. Privatization of Flood Risk: 3. Multi-Peril Homeowners Policies covering Flood Peril: 4. Community-Based Flood Insurance Policy Contracts 5. Integrated Watershed-Based Risk Management Strategy 6. Technological Innovation in Financing Large-Scale Natural Disasters:

There were four broad causes for economic regulation: (4

1. People insisted that social & ethical values need to be reflected in the operation of the economy, in addition to economic values. 2. The government was viewed as necessary to more efficiently coordinate and use the resources, as it is able to prescribe land use zoning ordinances and building code standards 3. Due to the widespread flooding in the 60s, people became interested in shifting risk from themselves to the government. 4. Sole reliance on insurance markets was not an option. Historically, the insurers and individuals have not had sufficient information for the market to operate effectively:

*The Flood Insurance Reform Act of 2012 didn't resolve all of the flood managementissues of the NFIP. Several issues remain for future congressional consideration,including:

1. The increasing flood risk vulnerability due to frequent extreme weather events and population growth in flood prone areas 2. Affordability of insurance coverage in era of actuarial premium pricing 3. Debt forgiveness 4. Accuracy of flood hazard maps and risk assessment methods 5. Movement toward a comprehensive integrated watershed management framework of risk perception, risk management, and disaster response strategy 6. Feasibility of catastrophe disaster insurance 7. Federal disaster assistance and moral hazard

Issues with the current plan include: (5

1.Even though residents who have a federally backed mortgage and live in a floodplain need to have flood insurance, many do not purchase it 2. Many individuals misunderstand flood risk, thinking that if a 100 year flood occurs, there will be no more floods for 100 years. 3. NFIP rates may not adequately reflect the flood risk , because Congress requires that the coverage is widely available and affordable 4. The public cost of post disaster recovery financing is increasing. 5. Even though it is widely acknowledged that hazard mitigation is an important factor in reducing flood losses, it is not always incorporated into the risk management decision making of the government and private sector

The Government Accountability Office (GAO) produced a report listing some potential obstacles to offering wind coverage, including (6

1.Potential adverse selection 2. Communities would have to adopt wind hazard prevention standards 3 There is uncertainty about the adoption of programs to accommodate wind coverage 4 Difficulties in establishing a new rate setting process 5. Enforcement of new building codes 6 Administration & oversight of the program

Development of an Integrated Disaster Risk Management Approach:

Congress may want to develop a comprehensive integrated watershed management framework for risk perception, risk management, and disaster strategy that goes beyond floodplain development management

Revised analysis & mapping of Non-Accredited Levees:

FEMA agreed to map residual risk (levee protection) below the 100-year standard, and give credit for this protection. It is however difficult to assess the levee-specific risk and corresponding risk premium

Debt Forgiveness:

FEMA owes $17.5B to the Treasury for losses due to Katrina. Many experts do not believe that FEMA will be able to repay this within 10 years.

Private Sector Role in Financing Flood Risk:

It is feasible to expand the role of the private sector to assume a portion of the flood risk? Will reinsurers be willing to assume the risk and transfer it to the capital markets?

Premium Subsidies for NFIP in 2012

Prior to the Flood Insurance Reform Act of 2012, the NFIP did not have a financing mechanism to handle catastrophic losses. This increased the financial exposure to taxpayers. The 2012 Act allowed the rates to reflect catastrophic loss years, and established a catastrophe fund

Repetitive Loss Properties

Properties that experience several losses are called repetitive loss properties (RLP) and severe repetitive loss properties (SRLP). These properties make up a disproportionately large share of flood insurance claims (represent about 1% of the policies but over a third of the claims paid). 90% of these properties are eligible for property discounts

There are still several post-reform issues of contention: (5

Revised analysis & mapping of Non-Accredited Levees: Actuarial Soundness, Program Solvency & Affordability: Debt Forgiveness: Development of an Integrated Disaster Risk Management Approach: Private Sector Role in Financing Flood Risk:

Biggert-Waters Flood Insurance Reform Act of 2012 purpose? (1) how did it accomplish this purpose? (2)

The Biggert-Waters Flood Insurance Reform Act of 2012 reauthorized the NFIP though September 30, 2017. It made a number of changes to strengthen the financial solvency and efficiency of the program, including: Increasing the premiums Reducing incentives for rebuilding in flood risk zones

Actuarial Soundness, Program Solvency & Affordability:

The premium adjustments necessary to strengthen the financial solvency of the NFIP could result in property owners dropping their policies. One solution is to possibly implement means tested insurance premium increases (which preserve some of the subsidization for low income households) In addition, experts believe that even if FEMA increases the rates up to the maximum amount allowed (20% per year), they would still have insufficient funds to cover the obligations.

what has complicated the challenges facing US flood management policy. (2

There have, since the creation of the NFIP, been new social and economic challenges, nlike the growth in population and property values in coastal areas,

The creation of the NFIP marked a shift in US flood control policy, from

a "levee only' approach, to a risk identification/ risk financing and floodplain management approach that incorporates individual responsibility.

The communities in the Special Flood Hazard Area (SFHA) must

adopt and enforce the NFIP guidelines, in order for the residents to be eligible for coverage.

The Flood Insurance Reform Act of 2012 requires FEMA (3

to develop risk models, flood zones, and insurance rates that account for different non-accredited levee scenarios.

Coastal Flood Hazard Risk Assessment and Mapping (WIND) (3)

policymakers considered expanding the NFIP to offer optional wind coverage. 1. Proponents argue that this is necessary because of difficulties of property owners obtaining affordable private wind coverage along the Gulf and Atlantic coasts 2. Opponents argue that there is already adequate coverage capacity via the private market or state residual market. Adding coverage to the NFIP will increase the financial exposure to taxpayers. Also, NFIP may not necessarily be able to determine actuarially sound rates

NFIP was established in 1968 to reduce both (2)

the property losses from flood peril, and the resultant public spending required to compensate the victims

Long Term Flood Insurance Contracts (LTFIC

this would involve private insurers issuing 5, 10 or 20 year flood insurance contracts combined with long term mitigation loans. To prefund the disaster costs, insurers need guaranteed premiums for long periods.

FEMA established the Repetitive Flood Claims (RFC) and Severe Repetitivem Loss (SRL) grant programs

to award to states and local governments to mitigate future flood losses. The grants can be used towards demolishing, relocating, elevating or floodproofing structures.