Congressional Research Service: 'Options for Making National Flood Insurance Program More Affordable' (Part 1 of 3)
Here are excerpts:
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SUMMARY
Concerns about the affordability of flood insurance premiums have come to the fore as
As full risk-based premiums are phased in under Risk Rating 2.0, some policyholders could be faced with large price increases either because they are currently buying coverage at subsidized rates and/or because the new rating system indicates that they now have a higher risk. Such increases raise issues of equity, as well as affordability. The NFIP currently insures just under 5 million structures in
The introduction of a means-tested NFIP affordability program has been under consideration by
A means-tested affordability program could be implemented in a number of different ways, which may differ in how to measure when a premium might impose a cost burden on a policyholder. Means-tested affordability assistance could take a capped-premiums approach, an income-based approach, a housing burden-based approach, a combined income- and housing burden-based approach, or a community characteristics approach.
In addition, an affordability program is only one possible way of reducing the cost burden to policyholders. This report outlines a range of policy options
* reducing the amount that policyholders pay through the introduction of a mean-tested affordability program;
* reducing the amount that individual policyholders pay by increasing participation in the NFIP, which could distribute program costs amongst a larger population than at present;
* increasing income to the NFIP, which could be used to reduce policyholders' contributions to the costs of the program;
* reducing the NFIP debt and thus the amount that policyholders pay in interest on the debt; or
* increasing mitigation activities, which may reduce flood damages and thus flood claims, which could reduce the amount that policyholders have to pay for claims.
The report also includes a table summarizing past legislative proposals related to NFIP affordability.
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Contents
Introduction ... 1
Affordability and Solvency of the National Flood Insurance Program ... 1
Premium Subsidies and Cross-Subsidies ... 3
Fees and Surcharges ... 4
Legislative Reforms to Address NFIP Solvency and Affordability ... 6
Risk Rating 2.0 ... 7
Affordability of NFIP Premiums ... 8
Options to Reduce the Cost Burden on NFIP Policyholders ... 9
Introduce a Means-Tested Affordability Program ... 10
Options for a Means-Tested Affordability Program ... 10
Reduce the Amount That Policyholders Pay to the NFIP ... 14
Options to Reduce the Amount That Policyholders Pay to the NFIP ... 14
Increase NFIP Participation ... 15
The Mandatory Purchase Requirement ... 15
Options to Increase NFIP Participation ... 16
Increase NFIP Income ... 19
Options to Increase NFIP Income ... 20
Reduce NFIP Debt ... 20
Options to Reduce NFIP Debt ... 22
Reduce Flood Damage Through Mitigation ... 24
Property-Level Mitigation ... 26
Community-Level Mitigation and Floodplain Management Standards ... 27
Options to Encourage Property-Level Mitigation Activities ... 28
Options to Encourage Community-Level Flood Risk Reduction Measures ... 29
Concluding Comments ... 32
Tables
Table 1. Legislative Proposals Related to NFIP Affordability ... 35
Contacts
Author Information ... 36
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Introduction
Many Members and stakeholders have expressed concern about the perceived affordability of flood insurance premiums, concerns which have come to the fore as the
Nationally, according to
These impending rate raises, which vary from
The introduction of a means-tested NFIP affordability program has been under consideration by
A central decision in any reform of the NFIP is who should bear the costs of floodplain occupancy in the future: individual policyholders (the insured), federal taxpayers, uninsured flood victims, or some combination of these. Increases in NFIP premiums under Risk Rating 2.0 may call further attention to the distribution of flood costs as an important policy concern.
Affordability and Solvency of the National Flood Insurance Program
The NFIP is the primary source of flood insurance coverage for residential properties in
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1
2 Ibid.
3 H.R. 2874, the 21st Century Flood Reform Act; S. 1313, the Flood Insurance Affordability and Sustainability Act of 2017; and companion bills S. 1368 and H.R. 3285, the Sustainable, Fair, and Efficient (SAFE) Flood Insurance Program Reauthorization Act of 2017.
4 H.R. 3167, the National Flood Insurance Program Reauthorization Act of 2019; and companion bills S. 2187 and H.R. 3872, the National Flood Insurance Program Reauthorization and Reform Act of 2019.
5 Companion bills S. 3128 and H.R. 5802, the National Flood Insurance Program Reauthorization and Reform Act of 2021.
6 H.R. 5376.
7 For more information on the NFIP, see CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
8 Title XIII of P.L. 90-448, as amended, 42 U.S.C. Sec.4001 et seq.
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The last long-term reauthorization of the NFIP ended at the end of FY2017. Since then, 22 short-term NFIP reauthorizations have been enacted,/9 and the NFIP is currently authorized until
As a public insurance program, the objectives of the NFIP are different from the profit-maximization goals of private-sector companies. The NFIP has two main purposes: to provide access to primary flood insurance to properties with significant flood risk who might not otherwise be able to obtain insurance, and to reduce flood risk through the adoption of floodplain management standards. A longer-term objective of the NFIP is to reduce federal expenditure on disaster assistance after floods by substituting insurance payments for aid, with individual policyholders funding at least part of their recovery from flood damage./11
For example, the
Flood is one of the few natural hazards for which at-risk residents pay some of the costs after a disaster.
A key design feature of the NFIP is that policyholders' premiums, fees, and surcharges are intended to pay for all flood-related damages and program expenses,/14 with the option to borrow from the
GAO notes that
The NFIP has been on the GAO high-risk list since 2006 because of concerns about its long-term fiscal solvency and related operational issues and, more recently, concerns about the NFIP's fiscal exposure to climate change./17
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9 For additional information on NFIP reauthorizations since the end of FY2017, see CRS Insight IN10835, What Happens If the National Flood Insurance Program (NFIP) Lapses?, by
10 P.L. 117-328. For more information on NFIP reauthorization, see CRS Insight IN10835, What Happens If the National Flood Insurance Program (NFIP) Lapses?, by
11
12 The Special
13
14 Some types of properties receive subsidies, which are discussed in the section of this report on "Premium Subsidies and Cross-Subsidies."
15 See 82 Stat. 573 for text in original statute (Sec.1302(c) of P.L. 90-448). This language remains in statute (see 42 U.S.C. Sec.4001(c)).
16 GAO, High-Risk Series: Dedicated Leadership Needed to Address Limited Progress in Most High-Risk Areas, GAO21-119SP,
17 GAO, Climate Change: Opportunities to Reduce Federal Fiscal Exposure, Testimony Before the Committee on the Budget,
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In a 2017 report, the
CBO also estimated that the cost of providing discounted rates to some NFIP policies was about
GAO has been reporting since 1983 that the NFIP's premium rates do not reflect the full risk of loss because of various legislative requirements, which exacerbates the program's fiscal exposure./22 GAO has also noted that while
Premium Subsidies and Cross-Subsidies
Except for certain subsidies, flood insurance rates in the NFIP are directed to be "based on consideration of the risk involved and accepted actuarial principles,"/24 meaning that the rate is reflective of the true flood risk to the property.
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18 An actuarial shortfall is when income from premiums, fees, and surcharges is too low to cover the costs associated with paying claims on existing policies and writing and servicing those policies.
19 CBO Affordability, pp. 4-5. The actuarial shortfall estimated by CBO in this report excludes
20 CBO Affordability, p. 8.
21 GAO, National Flood Insurance Program: Fiscal Exposure Persists Despite Property Acquisitions, GAO-20-509,
22 Ibid., p. 29.
23 GAO,
24 42 U.S.C. Sec.4014(a)(1).
25
26 For a brief explanation of accepted actuarial principles, see NRC Affordability Report 1, pp. 36-38.
27
28 Flood zones are geographic areas that
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There are three main categories of properties which pay less than full risk-based rates:
* Pre-FIRM: Properties which were built or substantially improved/29 before
* Newly mapped: Properties newly mapped into an SFHA on or after
* Grandfathered: Properties that were built in compliance with the FIRM which was in effect at the time of construction./31
As of
Fees and Surcharges
In addition to the building and contents premium, NFIP policyholders pay a number of fees and surcharges mandated by law.
* The Federal Policy Fee (FPF) was authorized by
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29 44 C.F.R. Sec.59.1 defines substantial improvement as any reconstruction, rehabilitation, addition, or other improvement of a structure, the cost of which exceeds 50% of the market value of the structure before the start of construction of the improvement." For additional discussion of substantial improvement, see
30 42 U.S.C. Sec.4015(c).
31 A property can be grandfathered due to a change in its flood zone or a change in its Base Flood Elevation (BFE), which is defined as the water-surface elevation of the base flood, which is the 1%-annual-chance flood, commonly called the 100-year flood. The probability is 1% that rising water will reach BFE height in any given year.
32 An example of zone grandfathering would be a property that is initially mapped into a high-risk area (zone A) and is built to the proper building code and standards, and is later remapped into a higher-risk coastal area (zone V). If the policyholder has maintained continuous insurance coverage under the NFIP, the owner of this property can pay the flood insurance premium based on the prior lower-risk flood zone (zone A). Elevation grandfathering occurs when a new FIRM increases the BFE, but the property itself does not change flood zones.
33 Email correspondence from FEMA Congressional Affairs staff,
34 42 U.S.C. Sec.4014(a)(1)(B)(iii).
35 A Preferred Risk Policy is a Standard Flood Insurance Policy that offers low-cost coverage to owners and tenants of eligible buildings located in moderate- and low-risk flood zones in NFIP communities. PRP policies will no longer be offered under Risk Rating 2.0. See
36 See FEMA, Flood Insurance Manual, How to Write, revised
37 See FEMA, Flood Insurance Manual: How to Write, p. 3-50, revised
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* A Reserve Fund Assessment was authorized by
* All NFIP policies are also assessed a HFIAA Surcharge/40 following the passage of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA)./41 The amount of the surcharge is dependent on the type of property being insured. For primary residences, the charge is
* If a community is on probation from the NFIP,/43 all policyholders in that community will be charged a Probation Surcharge of
* Before the introduction of Risk Rating 2.0,
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38 Title II of P.L. 112-141.
39
992, as codified at 42 U.S.C. Sec.4017a).
40 Section 8(a) of P.L. 113-89, 128 Stat. 1023.
41 P.L. 112-141, Sec.100236, 126 Stat. 957; as amended by P.L. 113-89, Sec.16; 128 Stat. 1026.
42 For a description of how the fee is applied to different policy types, see
43 A community can be placed on probation by
44 FEMA, April 1, 2021 and
45 The SRL premium will be incorporated into new premium rates as NFIP policyholders move to Risk Rating 2.0 rates in 2022 and 2023.
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Currently, the categories of properties which pay less than the full risk-based rate are determined by the date when the structure was built relative to the date of adoption of the FIRM, rather than the flood risk or the ability of the policyholder to pay. GAO has suggested in a number of reports that linking subsidies to ability to pay rather than the existing approach, by which subsidies are linked to properties without regard to financial circumstances, would make premium assistance more transparent and thus more open to oversight by
Legislative Reforms to Address NFIP Solvency and Affordability
Competing aspects of the NFIP, particularly the desire to keep flood insurance affordable while making the program fiscally solvent, have made it challenging to reform the program./47 Different Administrations and Congresses have placed varied emphases and priorities on affordability or solvency for premium setting. As these priorities change, the balance between actuarial objectives (financial soundness and alignment of individual premiums with risk) and encouraging participation (by keeping premiums affordable and offering subsidies to certain classes of policyholders) has also changed./48
The tension between solvency and affordability has been illustrated by legislative changes in the last decade. The Biggert-Waters Flood Insurance Reform Act of 2012 (hereinafter BW-12)/49 moved the NFIP in the direction of better aligning policyholders' premiums with their actual flood risks by removing or accelerating phaseouts of discounted rates./50 A core principle of BW12 was the eventual removal of subsidized policies./51 Following the passage of BW-12, lawmakers received testimony and letters from constituents of multiple communities expressing concern that this would result in unreasonably high premiums that would create a financial burden on policyholders and could cause disruption to communities.
In response to these concerns,
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46 GAO Solvency, p. 27.
47 GAO Solvency, p. 1.
48
49 Title II of P.L. 112-141.
50 For more information on these changes, see Table 4 in CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
51 NRC Affordability Report 1, p. 1.
52 See P.L. 112-141, Sec.100236, 126 Stat. 957; as amended by P.L. 113-89, Sec.16; 128 Stat. 1026.
53 CBO Affordability, p. 4.
54 A single rate class (or risk classification) is a group of properties with the same flood risk classification; for example, pre-FIRM properties or properties with the newly mapped subsidy.
55 The chargeable risk premium rate for any property may not be increased by more than 18% per year (except in certain circumstances, which are listed); see 42 U.S.C. Sec.4015(e)(1). The chargeable risk premium may not be increased by an amount that would result in the average of such rate increases for properties within the risk classification exceeding 15% of the average of the risk premium rate for properties within the risk classification; see 42 U.S.C. Sec.4015(e)(3).
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In other words, the average annual premium rate increase for primary residences within a single risk classification rate may not be increased by more than 15% a year, while the individual premium rate increase for any individual policy may not be increased by more than 18% each year./56
Other categories of properties are required to have their premium increased by 25% per year until they reach full risk-based rates, including (1) nonprimary residences; (2) nonresidential properties; (3) business properties; (4) properties with severe repetitive loss;/57 (5) properties with substantial cumulative damage;/58 and properties with substantial damage/59 or substantial improvement after
Risk Rating 2.0
Risk Rating 2.0 represents the biggest change to the way the NFIP calculates flood insurance premiums since its inception. Under Risk Rating 2.0, premiums for individual properties will be based on their individual flood risk.
Risk Rating 2.0 went into effect on
Under Risk Rating 2.0, premiums for an individual property are based on that property's specific flood risk, as opposed to being placed in a general risk category based on flood zones./63 The premium is calculated based on the specific features of the property, including structural variables such as the foundation type of the structure, the height of the lowest floor of the structure relative to base flood elevation, and the replacement cost value (RCV)/64 of the structure. Structures with higher replacement costs than current local or national averages should pay more for their NFIP coverage than structures that are below the average RCV, which should pay less./65
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56 The percentage increases are based on the current premium (e.g., a 15% annual increase from the prior year premium), rather than the percentage difference between the current premium and the actuarial rate (i.e., a rate increase of 25% does not mean the pre-FIRM subsidy is eliminated in four years).
57 Severe repetitive loss properties are those that have incurred four or more claim payments exceeding
58 A property with substantial cumulative damage is any property that has incurred flood-related damage in which the cumulative amounts of payments under the NFIP equaled or exceeded the fair market value of such property. See 42 U.S.C. Sec.4014(a)(2)(C).
59 44 C.F.R. Sec.59.1 defines "substantial damage" as damage of any origin sustained by a structure whereby the cost of restoring the structure to its before-damaged condition would equal or exceed 50% of the market value of the structure before the damage occurred. For additional discussion of substantial damage, see FEMA Fact Sheet, NFIP "Substantial Damage" - What Does It Mean? at https://www.fema.gov/press-release/20210318/fact-sheet-nfip-substantial-damagewhat-does-it-mean-0.
60
61 CBO Affordability, p. 21 and p. 4.
62
63 For a more detailed explanation of flood zones, see CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by
64 Before Risk Rating 2.0, the premium for a property was based on the amount of insurance purchased for a structure rather than the replacement cost of the structure. In particular, structures whose value are above
65
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Risk Rating 2.0 also considers geographical variables such as the distance to water, the type and size of nearest bodies of water, flood frequency, and the elevation of the property relative to the flooding source. Risk Rating 2.0 also incorporates a broader range of flood frequencies and sources than the current system; in particular, pluvial flooding (flooding due to heavy rainfall)./66 Risk Rating 2.0 will continue the overall policy of phasing out NFIP subsidies that began with BW-12 and continued with HFIAA, which slowed the rate at which subsidies were phased out for primary residences. If policyholders are currently paying less than the full risk-based rate for their property, their premium will increase over time until they reach the actuarial rate for their property. However, limitations on annual premium increases are set in statute,/67 and
Nationally, an estimated 77% of policyholders will see an increase in their premiums in the first year of Risk Rating 2.0, with 23% of policyholders seeing a decrease./69 The impending rate raises will vary from
As full risk-based premiums are phased in under Risk Rating 2.0, some policyholders could be faced with large price increases either because they are currently buying coverage at subsidized rates, or because the new rating system indicates that they now have a higher risk, or both.
Affordability of NFIP Premiums
The introduction of Risk Rating 2.0 has renewed concerns that full risk-based premiums could be unaffordable for some households and could lead property owners to either purchase lower amounts of coverage or choose not to purchase flood insurance at all. It has been suggested that some property owners might not be able to afford to remain in their homes if flood insurance premiums were too high./71 Such increases raise issues of equity, as well as affordability. Premium increases under Risk Rating 2.0 may have the greatest effect on low- and moderate-income policyholders and communities,/72 as well as other potential impacts. For example, if homeowners and renters drop their insurance because of affordability issues, it may affect their ability to receive
Higher premiums could potentially prevent achievement of the long-standing program objective of increasing the number of properties covered by flood insurance./74 If NFIP policyholders were to cancel their policies, the federal government could face increased costs in the form of
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66 For additional information about Risk Rating 2.0, see CRS Report R45999, National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0, by
67 42 U.S.C. Sec.4015(e).
68 See Table 1 in CRS Insight IN11777, National Flood Insurance Program Risk Rating 2.0: Frequently Asked Questions, by
69
70 Email from FEMA Congressional Affairs staff,
71 GAO,
72 See, for example,
73 GAO, Overview of GAO's Past Work on the National Flood Insurance Program, GAO-14-297R,
74 NRC Affordability Report 1, p. 2.
75 NRC Affordability Report 1, p. 64.
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Continues with Part 2 of 3
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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R47000
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Congressional Research Service: 'Options for Making National Flood Insurance Program More Affordable' (Part 3 of 3)
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