level, but also residual risk such as levee failure due to overtopping, seepage, and so forth can be incorporated. This detailed level of probability assessment and damage assessment at the insured-structure level is where NFIP needs to head in the long term.31

Probabilistic risk assessment (PRA) involving Monte Carlo-simulated flood result scenarios is being done by private firms such as Swiss Reinsurance and CoreLogic (Czajkowski et al., 2012), and can be adapted to work nationwide to price flood insurance in the NFIP. The state of North Carolina has already demonstrated its ability to estimate inundation-level probabilities at the structure level, using Lidar or similar technology, and estimate structure damage consequences at each water inundation level for any given structure, eliminating the need to treat all properties across the nation in the same zone as having equivalent risk and being charged the same premium. These are the critical inputs into the actuarial rating formula (5-3), which can now be performed even more accurately at the individual-structure level than before, and can provide a more accurate alternative to simply aggregating (or averaging) expected loss costs across disparate entities within a grouped NFIP zone classification. Indeed, Czajkowski et al. (2012) have shown that substantial expected loss differences are discernible even within a single-priced NFIP zone inside a concentrated geographic location (e.g., Travis County, Texas), and this variability is exacerbated when comparing across disparate geographic areas having the same zone classification (e.g., Galveston, Texas). Because the same rate is charged by the NFIP to all entities nationally having the same characteristics and which are classified as being in the same zone, this can lead to substantial over- and undercharging of premiums on a risk basis (GAO, 2008). This can be improved (corrected) using PRA methods, resulting in more accurate risk-based (actuarial) pricing within NFIP. Moreover, not all properties in a similar zone classification pose the same risk, and charging the same premium across these properties encourages adverse selection and does not enhance actuarial soundness of the program.

To the extent possible to better achieve fiscal soundness, the properties that have been grandfathered into the NFIP or that receive discounts due to statutory considerations should have their pricing moved to the actuarially based prices using the detailed probability-of-inundation estimates and detailed economic damage models. This would strengthen the program and further the goal of risk-based pricing.

ROLE AND UTILITY OF MANDATORY INSURANCE BEHIND LEVEES

When the NFIP was created, property owners could purchase flood insurance voluntarily. In 1973, Congress passed the Flood Disaster Protection Act (Public Law 93-234) finding that,

(1) annual losses throughout the Nation from floods and mudslides are increasing at an alarming rate, largely as a result of the accelerating development of, and concentration of population in, areas of flood and mudslide hazards; (2) the availability of Federal loans, grants, guaranties, insurance, and other forms of financial assistance are often determining factors in the utilization of land and the location and construction of public and of private industrial, commercial, and residential facilities; (3) property acquired or constructed with grants or other Federal assistance may be exposed to risk of loss through floods, thus frustrating the purpose for which such assistance was extended; (4) Federal instrumentalities insure or otherwise provide financial protection to banking and credit institutions whose assets include a substantial number of mortgage loans and other indebtedness secured by property exposed to loss and damage from floods and mudslides ….

The purpose of this Act was to

require State or local communities, as a condition of future Federal financial assistance, to participate in the flood insurance program and to adopt adequate flood plan ordinances with effective enforcement provisions consistent with Federal standards to reduce or avoid future flood losses; and require the purchase of flood insurance by property owners who are being assisted by Federal programs or by federally supervised, regulated, or insured agencies or

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31 In the short or intermediate term the individually assessed expected losses can be used for aggregation to form a smaller set of risk classes, each of which is charged an average price. This is different from what is currently being done.



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