In Section 100236 of the Biggert-Waters Flood Insurance Reform Act of 2012, Congress directed FEMA to cooperate with the National Academy of Sciences on an affordability study. Section 100236 referred to another section of BW 2012, which called on FEMA to develop an “affordability policy framework” and affordability policy options to mitigate adverse effects of premium increases. These affordability policy options were to be evaluated as part of the Section 100236 study. Section 9 of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014) further emphasized the interest of Congress in having FEMA submit concepts for an affordability framework, and added time and resources to support the national affordability study called for in Section 100236 of BW 2012.
This is the first of two reports from the National Research Council Committee on the Affordability of National Flood Insurance Program Premiums. It describes policy options that might be part of an affordability strategy. The second report will propose analytical procedures with which FEMA might conduct an analysis of those options. This concluding chapter summarizes briefly this report’s key findings in light of objectives for Report 2.
The objective of BW 2012 was to yield NFIP risk-based premiums for all policies and an NFIP financial structure that would avoid large future
debt.1 Provisions of BW 2012 that were expected to achieve those results, and the history of those efforts, were discussed in Chapters 2 and 3. The elements of the affordability framework mentioned in BW 2012 and stressed in Section 9 of HFIAA 2014, called for actions that could provide assistance to households for which NFIP risk-based premiums would be unaffordable. The concern for affordability was motived by two situations that were expressed in testimony and constituent letters after BW 2012 began to be implemented. The first cause for concern was that NFIP risk-based premiums might impose unaffordable costs on some property owners (and renters) that were mandated to purchase flood insurance and that where there were concentrations of such properties (Chapter 5), financial stresses on individual households may have effects on the economy of a neighborhood or community. A second cause for concern was that higher premiums might result in greater noncompliance with the mandatory purchase requirement and discourage voluntary purchase (Chapter 4).
This committee’s second report will describe an analytic protocol(s) that FEMA could employ to simulate effects of different affordability policies on NFIP and on policyholders. The policy alternatives that FEMA might evaluate can be developed by applying the framework for organizing the decisions that must be made in designing an assistance program (Chapter 6) and policy alternatives (Chapter 7). Chapter 7 presented policy alternatives that have been suggested by others or that the committee has developed that could enhance affordability of flood insurance. Some of the options are mitigation actions that would lower risk and thus lower premiums. Other options directly reduce amounts paid for insurance premiums.
The committee’s Report 2 will propose a procedure(s) for FEMA to use in conducting a national analysis of affordability policy options. A premise of Report 2 will be that NFIP risk-based premiums will be paid by all policyholders. Therefore, assistance policy options will be formulated for illustration as necessary to describe the computational and data needs for assessing the full array of policy options that FEMA may consider. One example of an affordability policy option is the combination of NFIP risk-based premiums for all, with means-tested vouchers for premium assistance funded by surcharges on all policies. Another example is the combination of NFIP risk-based premiums for all, with means-tested mitigation grants funded by general federal revenues for the most cost-effective (premium reducing) mitigation actions.
For any policy option, analytical procedures must be capable of esti-
1HFIAA 2014 reinstated grandfathering and changed when some households that were paying pre-FIRM subsidized premiums would pay NFIP risk-based premiums. HFIAA 2014 made no other changes to sections of BW 2012 that affected premiums. The present report presumed full implementation of BW 2012 as envisioned originally.
mating effects on different objectives. The set of objectives will be derived from the specific language of BW 2012 and HFIAA 2014 and from the present report. Evaluation objectives will include the following:
- The number of households subject to mandatory insurance purchase and are cost burdened by paying NFIP risk-based premiums
- The total of NFIP premiums and surcharges less claims paid and administration costs for a specified period (net program revenue)
- Total federal outlays for payments to cover NFIP net revenue “shortfall,” for premium assistance, for federal share of mitigation cost, and for post-flood aid for a specified period
- Number of policies in force (takeup rate)
In its second report, which will be issued later in 2015, the committee will report on the costs for FEMA to implement the protocol(s), in consideration of computational needs, access to available data, and a sampling strategy for collecting data that is not now available. To refine the descriptions of data needs and costs, the analytic protocol(s) will be tested as a proof-of-concept by using data and readily available analytic platforms that are available from the North Carolina Department of Public Safety.