Affordability of National Flood Insurance Program Premiums Report 2 (2016) / Chapter Skim
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. In this most recent reauthorization, Congress placed a particular emphasis on setting flood insurance premiums following actu arial pricing principles, which was motivated by a desire to ensure that future revenues were adequate to pay claims and administrative expenses (NRC, 2015a)
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FEMA is directed to propose an affordability framework to Congress 18 months after completing the affordability study.2 The affordability framework was to include actions that advanced the original goals for the NFIP, which were to ensure reasonable insurance premiums for all, base all premiums on risk, secure widespread participation, and earn premium and fee income that covers claims and expenses. Ideally, FEMA would formulate affordability policy alternatives for consideration, conduct an evaluation of the alternatives, and propose a preferred affordability strategy.
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To estimate future flood damage to specific properties the database would require information that characterizes the likelihood of floods of different magnitudes and property-specific flood loss estimates based on the first-floor elevation. With these data available, the model's computer program would simulate NFIP premium-setting practices and estimate premiums paid under both the "baseline condition" policy of BW 2012 and for any alternative affordability policy options that reduce flood insurance premiums (Report 1, Chapter 7)
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INFORMATION FOR MICROSIMULATION MODEL IMPLEMENTATION The microsimulation approach requires the construction of one or more microlevel databases. Data records for each property could include data on variables that characterize property features, socioeconomic characteristics of the property owner and occupant (if different from the owner)
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Furthermore, the NFIP database does not contain information for nonpolicyholders located in flood-prone areas and cannot be used to analyze whether an alternative policy option that would reduce premiums or provide assistance might promote takeup among such households. Some microsimulation model analyses will be for flood claims and perhaps needed to simulate the effects on premiums from new alternative policy options.
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Finding 3.3. Information available from the NFIP policy database and from FIRMs are missing data critical to a comprehensive analysis of affordability policy options.
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COMMITTEE REFLECTIONS AFTER REPORT 1 The committee was responsible for preparing two reports. The task for the first report was to describe concepts of affordability, assistance program design decisions, and policy options that may reduce the cost of premiums for those who were cost burdened by premium increases called for by BW 2012.
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HFIAA 2014's reinstatement of grandfathering, which will perpetuate cross-subsidies in the NFIP, will result in the program increasingly violating actuarial pricing principles if flood risks increase in the future. The NFIP divides the floodplain into the SFHA and the area beyond the SFHA.
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Specifically, Report 1 discussed an income approach and a housing cost as a percent-of-income approach to identify those who would be cost burdened by NFIP rate increases, as well as an approach suggested in HFIAA 2014 that identified premiums exceeding 1 percent of coverage as burdensome. Cost Burden During the preparation of Report 2 the committee continued to discuss different definitions of cost burden and ability to pay as it considered the data needed to build a microsimulation model module to estimate who would be eligible for assistance under various affordability policy options.
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The committee's review of the capped premium approach to defining cost burden and its assessment of policy analysis data needs and gaps led the committee to consider the premium as a percentage of the assessed value of the insured property as an alternative measure of cost burden. Property value, which is a substantial component of total wealth for many households, is used as a proxy for wealth.
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LINKING MITIGATION WITH PREMIUM ASSISTANCE Report 1 described how assistance might be offered for making flood insurance premium payments, for paying for some or all of mitigation that can lead to reduced premiums, or for a combination of both. One way to link flood insurance premium assistance with flood mitigation is through providing an annual assistance payment that the property owner could use to cover the premium and implement mitigation through a long-term loan.
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The second is that the federal taxpayer might bear floodplain location costs if the federal treasury develops a premium assistance program, makes up for NFIP premium revenue shortfalls, pays for pre-flood mitigation, or makes post-flood disaster assistance payments to individual households. Third, property owners and other floodplain or coastal zone inhabitants will bear costs for the losses that are uninsured or otherwise uncompensated.
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