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A Community-Based Flood Insurance Option (2015)

Chapter: 1 Introduction

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Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
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1

Introduction

Floods are one of the nation’s most destructive and costly natural hazards. Floods are also widespread across the nation; from 2010 to 2015, all 50 U.S. states experienced flooding (FEMA, 2015a). During the 2000s, annual flood damages increased dramatically to nearly $10 billion (ASFPM, 2013). The nation experienced disastrous coastal flooding from hurricanes Katrina in 2005 and Sandy in 2012. The National Flood Insurance Program (NFIP) payouts for the damages caused by the two hurricanes totaled roughly $18 billion and $9 billion in flood losses, respectively (FEMA, 2015b). Since 1978, the NFIP has paid more than $60 billion (in 2012 dollars) in flood losses. The historical means of combatting the adverse impacts of floods involved the construction of public works—dams, levees, flood walls and bypass channels. For many decades, however, the limits of these structural approaches to flood risk management have been recognized. A 1966 report from a special task force on national flood policy, for example, noted that despite the investments of substantial and increasing levels of public funds to construct and operate such projects, flood damages continued to rise (Task Force on Federal Flood Control Policy, 1966).

The Task Force report recommended the use of a broad array of options, including flood insurance, floodplain zoning and floodproofing, to lower the high costs of flood disaster assistance and to attenuate levels of flood risk and exposure. Following publication of the report, Congress established the National Flood Insurance Program (NFIP) in 1968. Originally administered by the U.S. Department of Housing and Urban Development (HUD), the program is now administered by the Federal Emergency Management Agency (FEMA). The NFIP has three main components: mapping,

Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×

floodplain management, and insurance. Through these components, the program identifies those areas at risk of flooding, aims to reduce flood impacts through mitigation and floodplain management, and offers federal backed flood insurance to protect against flood losses (Hayes and Neal, 2011; GAO, 2013). FEMA’s Federal Insurance and Mitigation Administration (FIMA) manages the NFIP.

Since its inception, the NFIP has achieved success and has faced some substantial challenges. Successes include the following:

  • Premiums: In fiscal year 2014, the NFIP collected about $3.8 billion in premiums and insured about $1.3 trillion in property (GAO, 2015).
  • Flood losses: The NFIP saves the nation an estimated $1.6 billion annually in avoided flood losses (FEMA, 2011a).

Program challenges include the following:

  • Financial debt: Through December 2014, FEMA owed the U.S. Treasury $23 billion (GAO, 2015).
  • Repetitive loss properties: Between 1978 and 2011, about 166,000 repetitive loss properties had 496,000 claims paid, costing the program fund $12.1 billion (Congressional Research Service, 2013). Furthermore, repetitive loss properties comprised about 1 percent of insured properties, but accounted for 25-30 percent of flood claims. At the time, this cost the NFIP $200 million per year (FEMA, 2009).
  • Takeup rates: The Congressional Research Service (2013) cited a news article that suggested that only 15-25 percent of at-risk properties in the Northeast special flood hazard area (SFHA) have flood insurance (Lee, 2012). An earlier, regional estimate in the Midwest suggested a takeup rate of about 20 percent (Galloway, 1995).
  • Affordability of premiums: The Biggert-Waters Flood Insurance Reform Act of 2012 (BW 2012), called for movement toward an insurance program with NFIP risk-based premiums. After the Act went into effect, there were many concerns about the financial burden that these increases would place on policyholders (New Orleans Times Picayune, 2013; NRC, 2015). The Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014) was enacted to address affordability concerns. HFIAA 2014 limited affordability relief by repealing or altering some BW 2012 requirements (GAO, 2015). For example, it reinstated grandfathering (NRC, 2015) and introduced an annual premium surcharge.
  • Subsidized premiums: As of September 30, 2013, the NFIP had more than 1.1 million subsidized flood insurance policies—about 21
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×

percent of all flood insurance policies (GAO, 2014b), which is often cited as being a financial burden on the program.

The NFIP is also challenged by widespread assumption that, because it offers insurance policies and shares some features with private insurance that it operates like private insurance, without the need for federal financial support. Indeed the NFIP has features similar to a private insurance program, but has objectives of ensuring reasonable insurance premiums, having NFIP risk-based premiums, securing high takeup rates, and earning premium and fee income to pay for claims and expenses (NRC, 2015). The NFIP’s unique suite of objectives, however, can lead to tradeoffs among its various objectives, which can be difficult to reconcile.

WHAT IS COMMUNITY-BASED FLOOD INSURANCE

Currently, the NFIP offers flood insurance only to individual policyholders. Community-Based Flood Insurance (CBFI) is being investigated as a possible policy option. To some extent, CBFI has already been evaluated as one option among a larger suite of NFIP policy reform options (e.g., FEMA, 2011b; Keybridge Research, 2011). During these earlier evaluations, FEMA (2011b) stated that a community-wide flood insurance premium would be determined by “aggregating the dollar sum of all the individual risk assessments conducted on structures throughout that community.” Additionally, it was assumed that premium costs would be distributed according to an individual’s assessed flood risk and that the policy would be purchased by the community on behalf of its residents. Flood insurance premiums would be collected through mechanisms such as property taxes or utility-like payments (Congressional Research Service, 2013).

In a more recent study (DePue et al., 2014), CBFI was characterized as the following:

  • a governmental or quasi-governmental entity that pays a premium,
  • the entity having an opportunity to lower insurance costs through mitigation and other measures,
  • insurance costs that may be distributed according to property taxes (for example), and
  • the individual cost relative to the total cost of a community-wide premium to be determined by the individual contribution to community risk.

The committee did not offer its own specific definition of CBFI, which is more appropriately in the purview of elected officials, federal and state agency staff, and citizens. The committee viewed CBFI in broad terms to

Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×

avoid premature narrowing of the discussion. Therefore, this report examines the future prospects for CBFI—whatever form it may take or whatever definitions may be employed.

REPORT FOCUS AND AUDIENCE

This consensus report is the collective effort of a 12-person National Research Council (NRC) committee. This report follows a style that differs slightly from the typical NRC consensus report. This report presents a discussion of theoretical policy options, rather than detailed recommendations for implementing a CBFI option. Much of the report represents the committee’s discussion and collective expert judgment. Consistent with its statement of task (Box 1-1), the committee identifies and examines the future prospects of a CBFI option. It neither advocates nor discourages CBFI, nor does it advise on how a CBFI program may be implemented. As

BOX 1-1
Statement of Task and Study Goals

An ad hoc committee of the National Research Council (NRC) will issue a consensus report examining future prospects for community-based flood insurance policies for the United States. Given the lack of experience with community-based flood insurance in the U.S., the committee’s report will identify and discuss topic areas and questions that it concludes will require further evaluation—and explain why—in order for FEMA and others to better evaluate strengths and weaknesses of community-based flood insurance.

Examples of these topic areas include

  • implementation and feasibility challenges of community-based flood insurance;
  • possible terms of community-based flood insurance policies (e.g., options for portions of communities to be covered; renters vs. owners insurance; limits and deductible policies);
  • pricing considerations, including possible catastrophic flood losses; and
  • potential roles for the private sector.

The committee’s report and discussions will consider analogues and lessons from past experiences in the National Flood Insurance Program (NFIP) with pros and cons of individual homeowner policies; relevant information and experience from private sector insurance firms that provide protection against losses in non-flood sectors (e.g., earthquake and fire), and insurance to municipalities; and other information as the committee sees fit.

Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×

described herein, CBFI would likely entail both strengths and weaknesses. For example, such an approach has the potential to reduce flood exposure, but at the same time poses some unique implementation and administrative challenges (FEMA, 2011b; Keybridge Research, 2011).

FEMA is the primary audience for this report. Other entities with interest in the topic are the the U.S. Department of Housing and Urban Development and other federal agencies; Congress and congressional staff; local and state officials; flood-prone communities; and private-sector flood insurance companies.

ORIGINS OF THE STUDY

To address many of the NFIP’s challenges, the U.S. Congress passed the BW 2012, key provisions of which required raising flood insurance premiums to reflect flood risks, thereby making the program more financially stable. HFIAA 2014 was later signed into law and called for modifications to the BW 2012 Act. For example, HFIAA 2014 restored grandfathered rates and limited yearly increases of flood insurance premiums (GAO,

BOX 1-2
Pertinent Section in the Homeowner Flood Insurance Affordability Act 2014

SEC. 23. STUDY OF VOLUNTARY COMMUNITY-BASED FLOOD INSURANCE

(a) Study—

(1) Study required.—The Administrator shall conduct a study to assess options, methods, and strategies for making available voluntary community-based flood insurance policies through the National Flood Insurance Program.

(2) Considerations.—The study conducted under paragraph (1) shall

(A) take into consideration and analyze how voluntary community-based flood insurance policies

(i) would affect communities having varying economic bases, geographic locations, flood hazard characteristics or classifications, and flood management approaches; and

(ii) could satisfy the applicable requirements under section 102 of the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a); and

(B) evaluate the advisability of making available voluntary community-based flood insurance policies to communities, subdivisions of communities, and areas of residual risk.

(3) Consultation.—In conducting the study required under paragraph (1), the Administrator may consult with the Comptroller General of the United States, as the Administrator determines is appropriate.

Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×

2014a). Other changes required a new surcharge mandated on all policies, and a new requirement to designate a new flood insurance advocate. Section 23 of HFIAA 2014 (Box 1-2) required FEMA to assess options for making voluntary community-based flood insurance available through the NFIP. Shortly after enactment of HFIAA 2014, FEMA asked the NRC to convene an expert committee to prepare a consensus report on the future prospects for a CBFI option.

REPORT ORGANIZATION

Chapter 2 summarizes the sponsor and guest speaker presentations that were made during a public committee meeting on January 7, 2015. Chapter 2 also summarizes presentations from invited speakers—from federal, state, regional, private, and nonprofit sectors—during a workshop on March 30, 2015. Two panel discussions occurred during the workshop: (1) community approaches to flood insurance and (2) flood insurance, risk, and management from the community perspective. These information gathering sessions provided useful input to the committee’s deliberations and are reflected in the report’s contents. Chapter 3 describes flood risk management strategies, existing community-based options for managing flood risk, and key flood insurance topics. Finally, Chapter 4 has two main sections—(1) a conception of CBFI, and (2) design considerations for CBFI. Chapter 4 discusses past definitions of a community and CBFI, the solutions that CBFI may provide and the challenges it may face, and considerations for the design of a future policy option.

Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 9
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 10
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 11
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 12
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 13
Suggested Citation:"1 Introduction." National Academies of Sciences, Engineering, and Medicine. 2015. A Community-Based Flood Insurance Option. Washington, DC: The National Academies Press. doi: 10.17226/21758.
×
Page 14
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River and coastal floods are among the nation's most costly natural disasters. One component in the nation's approach to managing flood risk is availability of flood insurance policies, which are offered on an individual basis primarily through the National Flood Insurance Program (NFIP). Established in 1968, the NFIP is overseen by the Federal Emergency Management Agency (FEMA) and there are about 5.4 million individual policies in the NFIP. The program has experienced a mixture of successes and persistent challenges. Successes include a large number of policy holders, the insurance of approximately $1.3 trillion of property, and the fact that the large majority of policy holders - 80% - pay rates that are risk based. NFIP challenges include large program debt, relatively low rates of purchase in many flood-prone areas, a host of issues regarding affordability of premiums, ensuring that premiums collected cover payouts and administrative fees, and a large number of properties that experience severe repetitive flood losses.

At the request of FEMA, A Community-Based Flood Insurance Option identifies a range of key issues and questions that would merit consideration and further analysis as part of a community-based flood insurance program. As the report describes, the community-based option certainly offers potential benefits, such as the prospect of providing coverage for all (or nearly all) at-risk residents and properties in flood-prone communities. At the same time, many current challenges facing the NFIP may not necessarily be resolved by a community-based approach. This report discusses these and other prominent issues to be considered and further assessed.

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