Fall/Winter 2015 Vol. 15 Number 2

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Improving the National Flood Insurance Program

Inundated homes, businesses, and schools in Minot, North Dakota, FEMA photos by Andrea Booher

Two Reports Evaluate Options for the Future

Of all natural disasters, floods are the most costly and affect the most people. And in spite of natural phenomena such as sea-level rise and more frequent heavy precipitation, new construction continues to flourish in flood-prone areas, increasing the number of homes and people in harm's way.

The National Flood Insurance Program (NFIP), created in 1968, aims to reduce flood losses for individuals as well as their reliance on federal post-disaster aid. While insurance rates for new structures reflect the risk of flooding, taking into account property elevation and other factors, structures built before floodplain maps became available received subsidized rates. Today, nearly 20 percent of the 5.5 million NFIP policies are subsidized and do not reflect actual risk.

The Biggert-Waters Flood Insurance Reform Act of 2012 and subsequent legislation require these subsidies to be phased out, which will result in substantial premium increases for those 1 million subsidized policies. Two recent Academies studies evaluated flood insurance options for the NFIP to consider as it pursues dual goals of offering fair and affordable rates and increasing participation in the program.

Risk-Based Rates
Most of the 1 million subsidized policies are tied to "negatively elevated" properties, or those whose lowest level, including the basement, lies below the current NFIP benchmark elevation for construction and floodplain management. These properties are more likely to incur losses as they are potentially subject to longer and deeper flooding and are inundated more often by smaller flood events.

One of the reports finds that current NFIP methods for calculating risk-based insurance rates don't fully capture the flood risk for these low-lying structures. It offers a number of alternative approaches for determining appropriate premiums, ranging from incremental changes to current methods to a complete overhaul of the system.

NFIP could determine more accurate rates by using local hazard data and water surface elevations from smaller, frequent floods, researching which drivers of flood damage are most important as well as the ability of levees to prevent inundation during frequent events, and adjusting damage estimates annually. It could also increase deductible amounts to reduce premiums or impose penalties for underinsured structures.

Alternatively, NFIP could undertake a comprehensive risk assessment, which would determine flood hazard for individual structures by understanding flood characteristics at very fine scales, describing the varying levels of protection offered by different mitigation strategies, and account for uncertainties related to current and future flood protection measures.

A Community Approach
In contrast to evaluating and determining rates for individual structures, NFIP could consider offering single policies that cover an entire community. Although community-based flood insurance would not resolve all of the nation's flood insurance challenges, it could provide the opportunity to increase purchase rates for coverage, promote mitigation and floodplain management strategies to reduce risk, and reduce administrative costs associated with administering a high number of individual policies, according to the other Academies report.

However, the report also discusses the challenges of a community-based flood insurance option and offers design considerations should such a program be created. Communities must have a willingness to participate, the ability to enter into a contractual agreement, and the authority to regulate land use and collect revenue, the report notes. And while a city or town might qualify, it is unclear whether the definition of community could extend to a neighborhood or business district.

Any future option must also consider who bears the risk, who determines and writes policy terms, how premium costs are priced and underwritten, and how compliance with purchase requirements are ensured.

-- Lauren Rugani

Tying Flood Insurance to Flood Risk for Low-Lying Structures in the Floodplain. Committee on Risk-Based Methods for Insurance Premiums of Negatively Elevated Structures in the National Flood Insurance Program; Water Science and Technology Board, Division on Earth and Life Studies; and Board on Mathematical Sciences and Their Applications, Division on Engineering and Physical Sciences (2015, 86 pp.; ISBN 978-0-309-37166-7). The committee was chaired by David T. Ford, president, David Ford Consulting Engineers, Sacramento, Calif.

A Community-Based Flood Insurance Option. Committee on Community-Based Flood Insurance Options; Water Science and Technology Board, Division on Earth and Life Studies; and Board on Mathematical Sciences and Their Applications, Division on Engineering and Physical Sciences (2015, 102 pp.; ISBN 978-0-309-37468-2). The study was chaired by Henry J. Vaux Jr., professor emeritus of resource economics and chair, Rosenberg International Forum on Water Policy at the University of California, Berkeley and Riverside.

Both studies were funded by the Federal Emergency Management Agency.

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