Floods take a heavy toll on society, costing lives, damaging buildings and property, disrupting livelihoods, and sometimes necessitating federal disaster relief, which has risen to record levels in recent years. The National Flood Insurance Program (NFIP) was created in 1968 to reduce the flood risk to individuals and their reliance on federal disaster relief by making federal flood insurance available to residents and businesses if their community adopted floodplain management ordinances and minimum standards for new construction in floodprone areas. Insurance rates for structures built after a floodplain map was adopted by the community were intended to reflect the actual risk of flooding (i.e., risk-based rates), taking into account the likelihood of inundation, the elevation of the structure, and the relationship of inundation to damage to the structure. Charging higher premiums for structures expected to suffer greater flood damage would make people aware of their flood risk and would transfer the cost of losses from taxpayers to property owners. Rates for existing structures were subsidized to encourage insurance purchase and community participation in the NFIP. The NFIP designers anticipated that the need for such subsidies would diminish over time as aging structures left the portfolio.
Today, rates are subsidized for one-fifth of the NFIP’s 5.5 million policies. Structure elevations are not known for most subsidized policies. However, the NFIP believes that most of these structures are negatively elevated, that is, the elevation of the lowest floor (including basement) is lower than the NFIP benchmark for construction standards and floodplain management ordinances—the water surface elevation with a 1 chance in 100 of being exceeded annually (called the 1 percent annual chance exceedance elevation or base flood elevation). Compared to structures built above the base flood elevation, negatively elevated structures are more likely to incur a loss because they are inundated more frequently, and the depths and durations of inundation are greater.
When subsidies are phased out to improve the fiscal health of the NFIP, as required by the Biggert-Waters Flood Insurance Reform Act of 2012 and subsequent legislation, premiums for negatively elevated structures will rise, in some cases substantially, to cover the expected losses. Consequently, it is important to ensure that NFIP methods used to calculate risk-based premiums for negatively elevated structures are credible, fair, and transparent. This report examines current NFIP methods for calculating risk-based rates for negatively elevated structures; identifies changes in analysis methods and data collection that are needed to support risk-based premiums; and discusses the feasibility, implementation, and cost of making these changes (Box S.1).
CURRENT NFIP METHODS
The first task of the committee was to review current NFIP methods for calculating risk-based premiums, including the floodplain analysis and mapping that support insurance rate setting (Box S.1). The NFIP expresses flood risk in terms of the expected economic loss due to inundation and the probability of that loss. Information about the flood hazard, determined through NFIP flood studies, the vulnerability of the
An ad hoc committee will conduct a study of pricing negatively elevated structures in the National Flood Insurance Program. Specifically, the committee will
- Review current NFIP methods for calculating risk-based premiums for negatively elevated structures, including risk analysis, flood maps, and engineering data.
- Evaluate alternative approaches for calculating “full risk-based premiums” for negatively elevated structures, considering current actuarial principles and standards.
- Discuss engineering, hydrologic, and property assessment data and analytical needs associated with fully implementing full risk-based premiums for negatively elevated structures.
- Discuss approaches for keeping these engineering, hydrologic, or property assessment data updated to maintain full risk-based rates for negatively elevated structures.
- Discuss feasibility, implementation, and cost of underwriting risk-based premiums for negatively elevated structures, including a comparison of factors used to set risk-based premiums.
structure being insured, and the performance of certain flood protection measures is incorporated into a flood risk assessment, which yields an estimate of the average annual loss. The insurance rate is determined from this loss after adjusting for expenses, deductibles, underinsurance, and other factors. This process is described in more detail below.
Flood Hazard Analysis and Mapping
In inland areas, NFIP flood studies focus on the expected behavior of a watershed, river channel, and adjacent floodplain where structures are located. In coastal areas, the studies also assess the effects of storm surge and wave action. Models of relevant physical processes are coupled with statistical models of weather events to compute flood depths and velocities, and their likelihood of occurring. The model prediction results are summarized in reports and portrayed on Flood Insurance Rate Maps, which show water surface elevations, floodplain boundaries, zones of flood severity, and other information. The maps are used to identify locations of high flood risk, to determine whether flood insurance is required, and, if so, to inform determination of a flood insurance premium.
Flood Risk Assessment
Flood risk assessments generally focus on four components:
- Flood hazard—the probability and magnitude of flooding
- Exposure—the economic value of assets subjected to flood hazard
- Vulnerability—the relationship of flood hazard properties to economic loss
- Performance—the effect of flood protection and damage mitigation measures in modifying the flood hazard, the exposure, or the vulnerability
The NFIP describes flood hazard using water surface elevation–exceedance probability functions, referred to as PELV curves. The curves, which were developed from flood studies in the early 1970s, represent natural watershed, channel, and tidal and wind behaviors throughout the range of possible flood events, and show the annual probability that flood waters will reach or exceed a given depth relative to the base flood elevation. Variations in flood hazard are described with 30 PELV curves, representing topographies ranging from broad, shallow floodplains to narrow, steep mountain valleys.
The NFIP describes vulnerability by relating expected damage to depth of inundation. A depth–
percent damage function, referred to as a DELV curve, expresses damage as a percentage of a structure’s replacement value (the exposure) for a specified depth of water in the structure. The NFIP uses two models—damage functions derived from NFIP claims data and U.S. Army Corps of Engineers (USACE) damage functions—to develop a blended DELV curve.
The NFIP describes the performance of levees and flood storage and diversion by comparing the properties of these measures to design and operation standards. If a measure meets those standards, then it is considered to provide complete protection from the 1 percent annual chance exceedance flood as well as floods with lesser velocities, water surface elevations, and discharge rates.
Risk-Based Insurance Rates
The NFIP determines insurance rates for classes of structures that share similar characteristics, including flood zone, occupancy, type of construction, the location of contents in the structure, and the structure’s elevation relative to the base flood elevation. The average annual loss is computed by summing the product of the DELV curve for a class of structures and each PELV curve, and then averaging the computed losses over the set of 30 PELV curves, weighted by the estimated fraction of structures in the various flood zones at various elevations. The average annual loss for the class of structures is converted to an insurance rate for that class by adjusting for expenses, the amount of underinsurance (because not all structures can be or are insured to their full value), the portion of the claim that will not be covered because of the policy deductible, and other factors.
NFIP methods for setting risk-based rates focus on rating structures that comply with NFIP construction standards, and their use has been optimized for structures with lowest floor elevations at or above the base flood elevation. However, the NFIP has applied risk-based methods to about 240,000 negatively elevated structures that have had an elevation survey. The NFIP uses the same method to calculate risk-based rates for negatively elevated structures, but requires additional information to be collected on building construction and contents value, a more detailed review of the policy application, and possibly verification of building construction details. The additional data are used to adjust the rate on a more individualized basis for negatively elevated structures.
Overall, the committee found that current NFIP methods for setting risk-based rates do not accurately and precisely describe critical hazard and vulnerability conditions that affect flood risk for negatively elevated structures, including very frequent flooding, a longer duration of flooding, and a higher proportion of damage from small flood events. In addition, the PELV and DELV curves have not been updated with modern data. Finally, many NFIP methods were developed decades ago and do not take full advantage of modern technological and analysis capabilities. Potential changes to NFIP methods to address these issues are summarized below.
The second task of the committee was to evaluate alternative approaches for calculating risk-based premiums for negatively elevated structures (Box S.1). The committee considered both incremental changes to current NFIP methods and different approaches, which would require research, development, and standardization; new data collection; and user training.
Incremental Changes to Current NFIP Methods
Conclusion 1. Careful representation of frequent floods in the NFIP PELV curves is important for assessing losses for negatively elevated structures. The shape of the PELV curve depends primarily on the difference between the 1 percent and 10 percent annual chance exceedance depths. However, a significant portion of potential losses to negatively elevated structures are caused by floods more frequent than those with a 10 percent annual chance of exceedance. A short-term solution is to use information from existing detailed flood studies to refine the PELV curves so that they define more accurately the water surface elevations for frequent floods. If a flood study developed the frequency information needed to determine the 1 percent annual chance exceedance elevation, it could be easily expanded to determine more frequent water surface elevations.
Conclusion 2. Averaging the average annual loss over a large set of PELV curves leads to rate classes that en-
compass high variability in flood hazard for negatively elevated structures, and thus the premiums charged are too high for some policyholders and too low for others. A short-term means to reduce the excessive variance in premiums is to calculate the average annual loss component of the flood insurance rate using a water surface elevation–exceedance probability function that represents the flood hazard at the structure’s location, rather than basing the calculation on the 30 PELV curves that represent flood hazard nationally. The appropriate function might be an existing PELV curve, but it is more likely that new categories of water surface elevation–exceedance probability functions would have to be developed to capture important differences in flood hazard conditions. Local meteorological, watershed, and floodplain properties (e.g., terrain, presence of levees) could be used to guide the selection of the appropriate PELV curve or category of water surface elevation–exceedance probability functions.
Conclusion 3. NFIP claims data for a given depth of flooding are highly variable, suggesting that inundation depth is not the only driver of damage to structures or that the quality of the economic damage and inundation depth reports that support the insurance claims is poor. The NFIP calculates damage from inundation depth alone, but other drivers of damage (e.g., duration of inundation, flow velocity, water contamination, debris content) may also be important. For example, a negatively elevated structure will commonly be inundated longer than a structure built above the base flood elevation at the same location, and the prolonged wetting of material will increase damage. Research would be required to determine which drivers of flood damage are important and to develop the appropriate damage prediction function for use in the rate calculation.
Conclusion 4. When the sample of claims data is small, the NFIP credibility weighting scheme assumes that USACE damage estimates are better than NFIP claims data, which has not been proven. The DELV model uses both USACE damage estimates and NFIP claims data, weighted according to their credibility. NFIP claims data are used when the sample size is large enough to assign 100 percent credibility at a selected confidence level. When NFIP claims data are
sparse, USACE damage estimates are weighted heavily, even though the quality of the damage estimates is unknown. With almost 50 years of NFIP claims data, it may no longer be necessary to incorporate USACE damage models of unknown origin and quality into NFIP damage estimates. Instead, the NFIP could build a large set of flood damage reports from relevant agencies (e.g., Federal Emergency Management Agency, USACE, National Weather Service, state and local agencies) and use it to adjust the DELV curves annually. Having multiple sources of damage data would also provide an independent check on NFIP data quality. Smaller improvements could be made by determining the quality of the USACE data—a difficult task given the lack of documentation—and revising the NFIP credibility scheme to weigh the two datasets appropriately.
Conclusion 5. Levees may reduce the flood risk for negatively elevated structures, even if they do not meet NFIP standards for protection against the 1 percent annual chance exceedance flood. The NFIP treats levees designed, constructed, and maintained to an acceptable standard as preventing damage from floods more frequent than those with a 1 percent annual chance of exceedance. Levees (or levee segments) that do not meet that standard are treated as providing lesser or no flood protection. However, these nonaccredited levees may provide some protection against the 50 percent and 10 percent annual chance exceedance floods, which contribute significantly to losses for negatively elevated structures. A short-term change is to modify the NFIP Levee Analysis and Mapping Procedure to assess the ability of nonaccredited levees to prevent inundation of negatively elevated structures by events more frequent than the 1 percent annual chance exceedance flood.
Conclusion 6. When risk-based rates for negatively elevated structures are implemented, premiums are likely to be higher than they are today, creating perverse incentives for policyholders to purchase too little or no insurance. As a result, the concept of recovering loss through pooling premiums breaks down, and the NFIP may not collect enough premiums to cover losses and underinsured policyholders may have inadequate financial protection. The NFIP
encourages the purchase of sufficient flood insurance to cover the value of the structure, but the mandatory purchase statute requires only that the amount of insurance cover the outstanding balance of the federally backed mortgage, if any. (In addition, the statutory limit of $250,000 coverage for single family structures, unchanged since 1994, means that many structures cannot be insured to their full value). The NFIP could discourage the deliberate purchase of too little insurance, and fairly compensate for it, by tying the underinsurance adjustment to the ratio of the amount of insurance purchased to the replacement cost value of the structure, as is currently done for structures in high-hazard coastal zones. Alternatively, the NFIP could reduce loss payments or impose other penalties for severely underinsured structures, although public policy issues may also have to be considered.
Conclusion 7. Adjustments in deductible discounts could help reduce the high risk-based premiums expected for negatively elevated structures. The current NFIP minimum deductible ranges from $1,000 to $2,000 for structure and for contents coverages. The NFIP offers premium discounts based on the dollar amount of the deductible chosen and whether the structure was built before or after floodplain maps were adopted by the community. However, more refined PELV curves and more accurate replacement cost information in rating policies could be used to develop deductible discounts that are more appropriate to individual expected annual losses. Minimum deductibles could also be increased, which would reduce premiums as well as NFIP expected claims payouts overall.
New Approach: A Comprehensive Risk Assessment
Conclusion 8. Modern technologies, including analysis tools and improved data collection and management capabilities, enable the development and use of comprehensive risk assessment methods, which could improve NFIP estimates of flood loss. A comprehensive risk assessment would describe risk over the entire range of flood hazard conditions and flood events, including the large, infrequent floods that cause substantial losses to the NFIP portfolio, and the smaller, frequent floods that make up a significant portion of loss to negatively elevated structures. Major
differences from current NFIP methods include the following:
- Rather than using a standard set of national PELV curves to describe flood hazard, water surface elevation–exceedance probability functions would be developed for a study area and used to determine the flood hazard for individual structures by modeling watershed, channel, and floodplain characteristics at fine spatial resolution.
- In addition to describing the effectiveness of levees and flood storage and diversion in protecting against the 1 percent annual chance exceedance flood, a comprehensive risk assessment would describe the various levels of protection offered by all elements of a flood protection system (e.g., reservoirs, levees, floodwalls, diversions and bypasses, channels, warning systems) and mitigation measures (e.g., elevating structures) through the entire range of flood events.
- A comprehensive risk analysis would account explicitly for all uncertainties—including uncertainties about current and future flood hazard; structure value, vulnerability, and elevation; and the current and future performance of flood protection measures—and account for them through the risk analysis.
These changes would improve both the accuracy and precision of flood loss estimates for structures or groups of structures, and thus, the accuracy and precision of rates based upon the loss estimates.
The third and fourth tasks of the committee concern collecting and updating engineering, hydrologic, and property assessment data needed for implementing risk-based premiums for negatively elevated structures (Box S.1). The committee focused on near-term data issues, which have been documented or seem likely to arise.
Conclusion 9. Risk-based rating for negatively elevated structures requires, at a minimum, structure
elevation data, water surface elevations for frequent flood events, and new information on structure characteristics to support the assessment of structure damage and flood risk. For risk-based rating, the NFIP requires an Elevation Certificate, which records the elevation of the lowest floor of a structure, measured by a land survey. However, the accuracy of the data is difficult to confirm. Vehicle-mounted lidar could potentially be used to validate structure elevation data on Elevation Certificates or to collect structure elevation data at a much lower cost. Because lidar measures the highest adjacent grade elevation, some work would have to be done to convert the data to lowest floor elevations.
The NFIP collects basic information on structure characteristics, such as the number of floors and the type of supporting foundation, but additional information is needed to support models that predict damage from inundation, duration of flooding, or other drivers of damage at the structure level (see Conclusion 3). New data needs include the characteristics and usage of basements, the properties of the foundation, the type of structure or architecture, the type of interior and exterior finishes, and the quality of construction. Finally, water surface elevation predictions for frequent events can be extracted from existing or new flood studies. Structure elevations and, in some cases, flood studies would have to be updated following a major flood event or the accumulation of sufficient vertical land motion to change the rate class. Structure characteristics would have to be updated after a major renovation.
Conclusion 10. The lack of uniformity and control over the methods used to determine structure replacement cost values and the insufficient quality control of NFIP claims data undermine the accuracy of NFIP flood loss estimates and premium adjustments. The NFIP obtains replacement cost data from insurance companies and agents, who use their own methods to make estimates. Replacement cost values could potentially be improved by (1) requiring all insurance companies and agents to use a single cost estimation method or (2) purchasing data already collected by private companies that use consistent methods to estimate replacement costs across the nation. Having multiple sources of replacement cost data would enable the NFIP to assess data quality and to choose which source is best for rating purposes. Replacement cost values would have to be updated following a disaster, structural modification, or a major socioeconomic change in the community.
Inconsistent replacement cost data and inaccurate and incomplete damage data may contribute to the documented variability in NFIP claims data for a given depth of inundation (see Conclusion 3). Data quality could be improved by collecting more data in damage reports, implementing a more thorough quality control and review process, or strengthening requirements on how data are collected and reported.
FEASIBILITY, IMPLEMENTATION, AND COST
The fifth task of the committee was to discuss the feasibility, implementation, and cost of underwriting risk-based premiums for negatively elevated structures (Box S.1). Changes to the water surface elevation–exceedance probability functions and the flood damage functions would strengthen the scientific and technical foundation for setting risk-based rates for negatively elevated structures. The incremental changes to PELV, DELV, and levee performance summarized above could be implemented quickly and at low or moderate cost (e.g., a few person months to a few person years). However, over the longer term, implementing a comprehensive risk analysis methodology and developing site-specific flood hazard descriptions, models that predict damage from multiple drivers, and probabilistic models that describe the performance of flood risk reduction measures would yield a much improved assessment of flood losses, and thereby strengthen the foundation for rate setting. Work done by other agencies (e.g., USACE) demonstrates that these changes are feasible. Implementation could be done in stages, and the use of relevant information, models, and analysis methods developed by other government agencies (e.g., USACE data on structures and derived information on hazard and performance) would speed the work and stretch NFIP resources. The changes outlined above will improve the accuracy and precision of loss estimates for negatively elevated structures, which in turn will increase the credibility, fairness, and transparency of premiums for policyholders.