Affordability of National Flood Insurance Program Premiums Report 1 (2015) / Chapter Skim
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5 Locations of Potential National Flood Insurance Program Affordability Challenges
5 Locations of Potential National Flood Insurance Program Affordability Challenges
Pages 65-98
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From page 65... ...
, this chapter discusses the geographic distribution of policies for each policy group. The result is to provide a perspective on the location and extent of potential affordability challenges if all 1 The Homeowner Flood Insurance Affordability Act of 2014 reinstated grandfathering.
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This dataset provides the geo graphic boundaries of approximately 220,000 census-block groups from the 2010 census that form the area of the United States and all territories. • FEMA National Flood Hazard Layer.
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available on flood insurance policies. FEMA policies in force vary from year to year so policy counts made at other times may differ from the counts reported here.
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; L = B + C + D L properties cover policies that under BW 2012 would see increases in rates of 25% per year until the NFIP risk-based premium was paid; the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA 2014)
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From page 69... ...
This total of 1,060,468 is displayed later in discussions of pre-FIRM subsidized policies.6 All National Flood Insurance Program Policies Figure 5-2 shows the distribution of all 5.5 million policies throughout the nation by county. As the figure shows, NFIP polices are distributed widely, but there are areas of high concentration.
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and 3.8 million in the coastal SFHA, for a total of 8.7 million housing units in floodplains (Doug Bellomo, 2014, Federal Emergency Management Agency, personal communication)
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LOCATIONS OF POTENTIAL NFIP AFFORDABILITY CHALLENGES 71 TABLE 5-1 NFIP Polices by State or Territory STATE NUMBER OF POLICIES Alabama 58,256 Alaska 3,014 American Samoa 2 Arizona 34,885 Arkansas 21,065 California 273,339 Colorado 22,913 Connecticut 43,400 Delaware 25,585 District of Columbia 2,361 Florida 2,029,025 Georgia 96,872 Guam 253 Hawaii 59,315 Idaho 6,937 Illinois 49,232 Indiana 29,573 Iowa 16,410 Kansas 12,867 Kentucky 25,051 Louisiana 483,218 Maine 9,319 Maryland 73,995 Massachusetts 59,773 Michigan 25,185 Minnesota 12,093 Mississippi 74,095 Missouri 26,206 Montana 5,876 Nebraska 12,709 Nevada 14,611 New Hampshire 9,489 continued
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72 AFFORDABILITY OF NFIP PREMIUMS -- REPORT 1 TABLE 5-1 Continued STATE NUMBER OF POLICIES New Jersey 246,498 New Mexico 16,200 New York 196,717 North Carolina 139,121 North Dakota 13,755 Northern Mariana Islands 10 Ohio 41,676 Oklahoma 17,742 Oregon 34,085 Pennsylvania 73,950 Puerto Rico 43,959 Rhode Island 16,101 South Carolina 206,611 South Dakota 5,456 Tennessee 32,780 Texas 629,862 US Virgin Islands 2,090 Utah 4,511 Vermont 4,579 Virginia 115,481 Washington 44,804 West Virginia 20,915 Wisconsin 16,104 Wyoming 2,506 (Records Missing Geocoding) 2,192 Grand Total 5,544,629 SOURCE: AECOM, 2014.
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In addition, FEMA maintains a National Flood Hazard Layer (NFHL) for areas where the paper map inventory has been converted to a digital format.
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The spatial pattern of significant premium increases for NFIP pre-FIRM subsidized policies is shown by state in Figure 5-4. The states that have the largest populations -- California, Texas, New York, and Florida -- have large numbers of pre-FIRM subsidized policies and high numbers of 8 census block group has a population of 600-3,000 people, or an average of 533 hous A ing units.
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SOURCE: AECOM, 2014. Figure 5-3 Bitmapped FIGURE 5-4 Distribution of NFIP pre-FIRM subsidized policies by state.
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The impression from Figure 5-6 is that the pre-FIRM subsidized policies are spread widely, but an important calculation based on the data underlying the map shown is that 80% of NFIP polices are concentrated within 6% of the US census block groups. Focusing on the purple areas suggests that there are FIGURE 5-5 Distribution of the ratio of total NFIP pre-FIRM subsidized policies to total policies.
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in which removing pre-FIRM subsidized premiums may affect a large percentage of households in a single community. SUMMARY Determining whether there are concentrations of NFIP policies may be useful for designing a national affordability framework.
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78 AFFORDABILITY OF NFIP PREMIUMS -- REPORT 1 • Slightly more than 1 million -- or 19% of the policyholders -- are pay ing pre-FIRM subsidized rates and will potentially see rate increases if the provisions of BW 2012 remain in effect. Pre-FIRM subsidized polices are found throughout the nation, but there are areas of concentration.
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From page 79... ...
Metrics for measuring affordability can be described, but the threshold for defining when an insurance premium creates a cost burden requires making a policy judgment. Given that some affordability criterion is chosen, the chapter presents a decision framework that could be used in the design of targeted assistance programs for flood insurance affordability.
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As discussed later, a chosen affordability concept and cost burden measure can be used to establish eligibility criteria for a program that provides financial assistance to make flood insurance more affordable. The cost burden measure also can be used to monitor changes in affordability of flood insurance and differences in affordability of insurance between areas or types of households.2 2 Although as discussed in this report, flood insurance is considered to be unaffordable to a household if and only if the household is cost burdened by having to pay for flood insurance, being cost burdened does not necessarily imply that a household would be eligible for financial assistance.
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Income Approach Many federal and state assistance programs, as well as provisions of the federal income tax code, provide assistance with housing costs and other expenses that is based on household income. For example, eligibility for public housing is limited to low-income and moderate-income households whose incomes do not exceed 80% of the median income in their county or metropolitan area.
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If policymakers were to choose the 30% threshold for the NFIP, for example, a household would be flood insurance cost burdened if its housing costs, including the NFIP premium, exceeded 30% of its income. Under that policy choice and criterion, the size of the burden would be the dollar amount beyond 30% of household income that would be required to pay for housing because of the amount of the flood insurance premium.
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In addition, the concept and measure can be used to establish eligibility criteria for a program that provides financial assistance to make flood insurance more affordable. Choosing an affordability concept and cost burden measure, however, is only one decision that must be made in designing such a program.
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84 AFFORDABILITY OF NFIP PREMIUMS -- REPORT 1 FIGURE 6-1 Considerations and policy options for designing an assistance program for a flood insurance affordability framework.
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below which households are considered cost burdened by flood insurance.7 The housing cost approach requires a definition of housing costs, a definition of income, and a threshold that identifies the ratio of housing costs to income at which housing costs are considered burdensome. After a cost burden measure has been selected, its components have been defined, and the applicable thresholds have been specified, whatever data needed to measure a particular household's flood insurance cost burden would have to be obtained and used by the agency that is administering the assistance program to determine whether the household is cost burdened.
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Because pre-FIRM subsidies and grandfathered premiums 8 The income and housing cost approaches are familiar to housing program administrators and might offer opportunities to link and potentially integrate flood insurance assistance with existing housing assistance programs. 9 a household is losing a pre-FIRM subsidy, data on the household's property that had not If been previously obtained may be needed to calculate the risk-based flood insurance premium.
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. To encourage continued compliance, policymakers might choose to target assistance to households that are flood insurance cost burdened and are required to purchase flood insurance.
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Although the most straightforward approach would be to base assistance on total rental housing costs, such an approach would probably provide assistance for housing costs that have nothing to do with flood insurance premiums. Some states that have property tax circuit breaker programs14 provide property tax assistance to renters on the basis of the 12 Resale prices may reflect the market's assumptions regarding future premium levels.
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. As noted previously, the capped premiums approach takes no account of household income, whereas the housing cost approach identifies as cost burdened households whose housing costs, including flood insurance, exceed a specified percentage of their income.
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percentage of them would likely be eligible on the basis of their individual circumstances. In addition to protecting the vitality of a community, this eligibility criterion could reduce administrative burden and costs by removing the need to establish eligibility of every household, as discussed further under Decision 6: How Will an Assistance Program Be Administered?
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Discussion of a variety of options is presented in Chapter 7; the focus here is on application burden and administrative costs of an assistance program. Providing premium assistance at the time of purchase, for example, might ease the application burden on the property owner relative to some other modes of delivering assistance.
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A related design question is the amount of assistance to provide if housing costs excluding flood insurance exceed whatever affordability standard has been adopted (for example, a household is cost burdened if housing costs are greater than 30% of income)
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For example, should the eligibility criteria and formula or algorithm for determining assistance amounts be specified so that the amount of assistance provided to a property owner is relatively stable or, changes in a highly predictable way? In addition, how can such stability or predictability be obtained while maintaining a high degree of accuracy in targeting assistance to those most cost burdened by flood insurance premiums?
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In administering a program of targeted assistance, policymakers must identify which entities are responsible for determining whether a property owner is eligible and how much assistance that property owner will receive under the established eligibility criteria and assistance formula or algorithm. In addition to the broad decisions that must be made about how to determine, for example, eligibility for assistance, many more detailed decisions will need to be made, including how to define a household, how to define income, how to treat a household's assets in determining its need for assistance, and whether to take into account the effects on unusually high nonhousing expenses (such as medical expenses)
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, which entails another administrative cost.20 Strategies that seek to minimize data needs include community eligibility options and homeowner eligibility based on extant public data. One community eligibility option would be to make all homeowners in a community eligible for assistance if, for example, the community's poverty rate is sufficiently high, the median income is sufficiently low, or many homeowners that previously paid pre-FIRM subsidized or grandfathered premiums.21 This approach will sacrifice some accuracy in targeting, providing assistance to homeowners who are not flood insurance cost burdened based on the basis of their individual circumstances and failing to provide assistance to cost-burdened homeowners in communities that are not eligible for assistance.22 In addition, even if a community eligibility approach identifies exactly the homeowners to whom policymakers wish to provide assistance, a remaining challenge is to determine the amount of assistance that will be provided to each individual homeowner without data specific to each homeowner.
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A second measure of cost burden uses an income test, and identifies a flood insurance premium as unaffordable for any household whose income is below a specified threshold. A third measure considers not only a household's income but also its housing costs, and assesses the ratio of housing costs to income when the NFIP premium is added to other housing costs.
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For example, providing assistance to more policyholders will require cutting the average amount of assistance provided if the total cost of the assistance program is to be held steady. If instead, more generous assistance is provided, insurance takeup rates might increase, but the total cost of the assistance program might also increase and incentives to mitigate might decrease.
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