Addressing Affordability in the National Flood Insurance Program

September 9, 2013

The National Flood Insurance Program (NFIP), housed within the Federal Emergency Management Agency (FEMA), offers flood insurance to residents and businesses of participating communities. Since Hurricane Katrina in 2005, the NFIP has been deeply in debt to the U.S. Treasury. As of July 2013, this debt stood at $24 billion. Last July, the president signed the Biggert-Waters Flood Insurance Reform Act with overwhelming bipartisan support from Congress. This bill extended the NFIP for five years and included new provisions regarding insurance premiums designed to improve the program's financial basis, say Carolyn Kousky, a fellow at Resources for the Future, and Howard Kunreuther, co-director at the Wharton Risk Management and Decision Processes Center.

Historically, some classes of policyholders in the NFIP had received discounted premiums that were never means-tested. The new legislation scheduled the phase out of many of these discounts, thus moving the program toward risk-based pricing.

  • Risk-based premiums are needed for the program to be financially self-sustaining.
  • They are also important to emphasize to policyholders the magnitude of the risk that they face.
  • And also to encourage them to invest in loss reduction measures to merit premium reductions.

Premiums are increasing for many policyholders based on this new legislation and updated flood hazard maps. As a result, many legislators are now wavering on their commitment to risk-based pricing for flood insurance because of concerns that many of their constituents will not be able to afford flood insurance. The legislation did not directly address this issue except to authorize a study by the National Academy of Sciences to examine affordability.

This year has seen the introduction of several pieces of legislation in Congress all aimed at slowing or completely repealing the elimination of the discounted rates that took effect with the Biggert-Waters Flood Reform Act. It is imperative to address the issue of affordability; this should be done in a means-tested manner separate from NFIP pricing.

Source: Carolyn Kousky and Howard Kunreuther, "Addressing Affordability in the National Flood Insurance Program," Resources for the Future and the Wharton Risk Management and Decision Processes Center, August 2013.

 

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