Flood insuranceOptions for providing affordable flood insurance premiums

The National Flood Insurance Program (NFIP) within the Federal Emergency Management Agency (FEMA) faces dual challenges of maintaining affordable flood insurance premiums for property owners and ensuring that revenues from premiums and fees cover claims and program expenses over time. A new congressionally mandated report from the National Research Council, the operating arm of the National Academy of Sciences, found that these objectives are not always compatible and may, at times, conflict with one another. The report discusses measures that could make insurance more affordable for all policy holders and provides a framework for policymakers to use in designing targeted assistance programs.

Although there are multiple ways to measure the cost burden of flood insurance on property owners and renters, the report found that there are no objective definitions of affordability. Where Congress or FEMA determine insurance premiums to be unaffordable, households paying those premiums might be made eligible for assistance through the NFIP. 

An NRC release notes that the report says that it will be up to policymakers to select which households will receive assistance, the form and amount of assistance provided, how it will be provided, who will pay for the assistance, and how an assistance program will be administered.

Implementing a combination of policy measures could help NFIP address affordability issues, the report says. Although it does not recommend whether specific policies should be implemented, it identifies possible measures:

• Prioritizing existing mitigation grants to households burdened by premiums. Mitigation could help lower the risk of flood-related damage, in turn reducing expected claims and premiums.
• Providing loans to financially burdened households for investments in mitigation measures.
• Issuing vouchers to policy holders for use in paying premiums or offsetting mitigation costs.
• Expanding the range of mitigation measures that can result in reduced premiums.
• Encouraging homeowners to choose higher deductibles.
• Expanding the role of insurance agents in educating policy holders about mitigation and other premium-reducing alternatives.
• Relying on the U.S. Treasury to help pay claims in catastrophic loss years to allow for lower risk-based premiums and less spending for an assistance program.
• Community measures that can lower premiums, such as enrollment in the Community Rating System and supporting mitigation that benefits clusters of structures, especially multifamily properties.

The report found that other policies, such as reduced administrative fees, disaster savings accounts, and income tax credits and deductions either may not have an effect on lowering premiums or may not be accessible to cost-burdened policy holders. 

The NRC says that a second Research Council report to follow later this year will propose alternative approaches for a national evaluation of affordability program policy options, informed in part by lessons learned from a proof-of-concept study.

The study was sponsored by the Federal Emergency Management Agency.

— Read more in Affordability of National Flood Insurance Program Premiums: Report 1 (National Academies Press, 2015)