Congressional Research Service: 'Options for Making National Flood Insurance Program More Affordable' (Part 2 of 3)

WASHINGTON, Jan. 7 -- The Congressional Research Service issued the following report (No. R47000) on Jan. 6, 2023, entitled "Options for Making the National Flood Insurance Program More Affordable:"

(Continued from Part 1 of 3)

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Options to Reduce the Cost Burden on NFIP Policyholders

An ongoing area of congressional interest is how to reduce the cost burden of an individual NFIP policy./76 Congress may consider several broad policy options which could reduce the cost of flood insurance to all policyholders through a variety of reforms to the structure of the NFIP. GAO noted that these options are not mutually exclusive and could potentially be combined, depending on the policy priorities of Congress; however, the options all involve trade-offs and implementing any of them would likely be challenging./77

Congress could consider actions that would

* reduce the amount that policyholders pay through the introduction of a mean-tested affordability program;

* reduce the amount that individual policyholders pay by increasing participation in the NFIP, which could distribute program costs among a larger insured population;

* increase income to the NFIP, which could be used to reduce policyholders' contributions to the costs of the program;

* reduce the NFIP debt and thus the amount that policyholders pay in interest on the debt; or

* increase mitigation activities, which may reduce flood damages and thus flood claims, which could reduce the amount that policyholders have to pay for claims.

This report identifies potential options in the above categories that could lead to reductions in the amount that NFIP policyholders have to pay.

Introduce a Means-Tested Affordability Program

Assistance through an affordability program could offset part or all of the cost of insurance through a number of approaches, which differ in the ways to measure when a premium might impose a cost burden on a policyholder. There are no objective definitions of affordability for flood insurance, nor are there objective thresholds to define "affordable" premiums either for an individual property owner or renter, or for any group of property owners or renters./78 Although a lower insurance premium clearly is more affordable than a higher one, there is no objective threshold that separates affordable premiums from unaffordable premiums. The threshold for defining when an insurance program creates a cost burden requires making a policy judgment./79 For example, GAO estimated that 47%-74% of policyholders could be eligible for subsidies if income eligibility was set at 80% or 140% of area median income (AMI), respectively./80

Policymakers will need to select which measure(s) will be used to target assistance to make flood insurance more affordable. They will also need to consider who will receive such assistance (e.g., only homeowners or also renters, only existing policyholders or also households that purchase flood insurance after the affordability program has begun). For example, if households without current NFIP insurance, who may have been deterred from buying insurance because of the cost, were not able to participate in an affordability program, it might exclude eligible low-income households. This could potentially raise questions of equity.

GAO has suggested in a number of reports that an affordability program that addresses the goals of encouraging consumer participation and promoting resilience could provide means-tested assistance through appropriations rather than through discounted premiums, and prioritize mitigation to reduce risk./81 Such programs may differ in how to measure when a premium might impose a cost burden on a policyholder. Means-tested affordability assistance could be in the form of a capped-premiums approach, an income-based approach, a housing-burden-based approach, a combined income- and housing burden-based approach, and a community characteristics approach.

In May 2022, FEMA submitted 17 legislative proposals to Congress outlining multiple reforms and actions to consider to reform the NFIP. One of these proposals was for a mean-tested assistance program to offer low- and moderate-income current and prospective policyholders a graduated premium discount./82

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75 NRC Affordability Report 1, p. 64.

76 GAO Solvency, p. 24.

77 GAO Solvency, p. 10.

78 NRC Affordability Report 1, p. 80.

79 NRC Affordability Report 1, pp. 79-80.

80 GAO Affordability Assistance, pp. 22-23.

81 GAO Solvency, p. 27.

82 FEMA, Legislative Proposals for the National Flood Insurance Program, https://www.fema.gov/sites/default/files/documents/fema_flood-insurance-reform-proposal_5242022.pdf.

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Options for a Means-Tested Affordability Program

1. Target premium discounts or subsidies to qualifying households. NFIP subsidies are currently tied to a property. Implementing a means-tested approach could decouple the subsidy from the property and instead attach it to the policyholder or group of policyholders on the basis of financial need./83 This could take the form of discounted rates or vouchers, where policyholders would be charged a full-risk premium but would receive a subsidy to cover the difference between what they are deemed able to pay and the full-risk rate premium. Policymakers might also choose to target assistance to households that are flood insurance cost-burdened and are required to purchase flood insurance. However, policyholders will also need to decide which properties are considered when determining a household's eligibility; for example, assistance could be limited to primary residences./84

a. Capped premiums approach. Under a capped premium approach, a flood insurance premium is defined as unaffordable if it is greater than a specified percentage of the coverage of the policy./85 For example, HFIAA directed FEMA to strive to minimize the number of policies with annual premiums that exceed 1% of the total coverage provided by the policy./86 A capped premium approach does not consider policyholders' resources and other expenses, and this option could provide subsidies to households which may not have financial need./87

b. Income-based approach. An income-based approach to affordability assumes that flood insurance imposes a cost burden and thus is unaffordable for any household whose income is below a specified threshold. That standard could be based on median income for the area or federal poverty guidelines, or other criteria. For example, to be eligible for certain federal housing programs, individual households must meet specific income limits expressed as a percentage of the area median income (AMI)./88 An NFIP affordability program based on individuals' or households' income could use similar measures./89 Means testing would add administrative complexity to the NFIP, but could be designed similarly to existing means-tested programs offered by the federal government./90 Under an income-based approach, lower-income households would be responsible for paying for a portion of the premium, with FEMA covering the remainder of the premium amount. As household income levels rise, the portion of the premium that would be covered by FEMA would decrease./91 FEMA noted that such a program would be relatively straightforward to implement; however, it could also provide benefits to households for which flood insurance is not unaffordable (e.g., households with low incomes but substantial assets)./92

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83 GAO Affordability Assistance, p. 11.

84 Different options for an NFIP affordability program are discussed in more detail in "Introduce a Means-Tested Affordability Program."

85 NRC Affordability Report 1, p. 81.

86 42 U.S.C. Sec.4015(j).

87 GAO Affordability Assistance, p. 18.

88 See Department of Housing and Urban Development, Methodology for Calculating FY2020 Medians, https://www.huduser.gov/portal/datasets/il/il20/Medians-Methodology-FY20r.pdf.

89 GAO Affordability Assistance, p. 12.

90 GAO Affordability Assistance, pp. 11-15.

91 FEMA, An Affordability Framework for the National Flood Insurance Program, 2018 (hereinafter FEMA Affordability Framework), p. 6, https://www.fema.gov/media-library/assets/documents/163171.

92 FEMA Affordability Framework, p. 26.

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c. Housing burden-based approach. A housing cost approach considers not only a household's income but also housing costs, and assesses the ratio of housing costs to income when the NFIP premium is added to other housing costs. Under this approach, policymakers would have to select (or delegate selection of) a threshold, usually expressed as a percentage, at which the ratio of housing costs to income is judged to become unaffordable. One way to identify housing burden is through the use of the PITI ratio: the ratio of mortgage principal and interest (PI), property taxes (T), and insurance (I), including flood insurance, to household income. A comparable measure of housing burden for renters is the ratio of rent plus insurance to household income./93 Previous work has shown that the PITI ratio is highly correlated with household income, so a program basing eligibility on the PITI ratio may effectively target lower-income households./94

FEMA suggested in its Affordability Framework that it would consider flood insurance unaffordable if flood insurance causes the ratio of PITI to income to exceed 0.3 to 0.4, cutoffs that are taken from both HUD and private mortgage industry standards./95 Based on an analysis of linked NFIP policy data and household income and Census Bureau American Community Survey (ACS) housing cost data,/96 FEMA found that the PITI ratio exceeded 0.4 for approximately 12% of homeowners with flood insurance policies in SFHAs./97 FEMA's analysis found that the PITI ratio for renters (defined as gross rent over income) is higher than those for homeowners, with 33% of renters inside SFHAs and 27% of renters outside SFHAs with a PITI ratio over 0.47, and concluded that by this definition, flood insurance is unaffordable for a substantial percentage of renters./98 The housing cost burden approach might create some potentially perverse incentives by providing larger benefits for households potentially overextended on housing costs, and smaller benefits for households who were more frugal in making their choices. This approach may also miss some households that may be of concern to policymakers and could potentially steer benefits away from some low-income policyholders. For example, a household without a mortgage may have a low income but also a low PITI ratio and thus would be ineligible for assistance under this approach. In particular, it may not provide benefits to retirees who have paid off their mortgages or low-income households that have inherited a property mortgage-free. In general, households with access to credit would be more likely to qualify for assistance through the mortgage component of the PITI-ratio.

Another concern with a PITI-based approach is that households in regions with high costs of living (and mortgage payments) might be more likely to benefit from the program than households in regions with lower costs of living./99 In addition, households would need to provide data on income and housing expenses, which may cause administrative burdens for both the policyholders to provide and FEMA to verify the data.

d. Income and housing burden-based approach. The FEMA affordability framework also considered an approach where benefits are targeted at households that are both income- and housing-burdened (which it noted is similar to HUD's Section 8 rental housing assistance program). It used the thresholds of 120% of AMI and housing burdens above 40% of income./100

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93 FEMA Affordability Framework, p. 15.

94 Lloyd Dixon, Noreen Clancy, Benjamin M. Miller, et al., The Cost and Affordability of Flood Insurance in New York City: Economic Impacts of Rising Premiums and Policy Options for One- to Four- Family Homes, Rand Corporation, RAND RR1776, Santa Monica, CA, April 2017, pp. 25-26, https://www.rand.org/pubs/research_reports/RR1776.html.

95 FEMA Affordability Framework, p. 15.

96 United States Census Bureau, American Community Survey (ACS), https://www.census.gov/programs-surveys/acs.

97 FEMA Affordability Framework, p. 6.

98 FEMA Affordability Framework, pp. 16-18.

99 FEMA Affordability Framework, p. 31.

100 FEMA Affordability Framework, p. 29.

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2. Target premium discounts or subsidies based on community characteristics. Rather than determine eligibility for affordability assistance based on characteristics of individual households, community characteristics could be considered as eligibility criteria./101 For example, policyholders could make all households in a community eligible for assistance if a specified percentage of them would likely be eligible on the basis of their individual characteristics. Alternatively, all homeowners in a community could be considered eligible for assistance if the community's poverty rate is sufficiently high or the median income is sufficiently low./102 This could reduce administrative costs by removing the need to establish eligibility of every household. Another potential eligibility criterion could be the engagement of state and local governments in certain mitigation activities./103 However, because this option does not consider financial need, some policyholders who do not face an affordability issue with their flood insurance premiums may receive assistance, while policyholders who have affordability issues but do not live in an eligible community would not receive assistance./104

3. Require recipients of affordability assistance to invest in FEMA-approved cost-effective mitigation measures. For example, property owners could receive grants or loans to help mitigate their flood risk and be charged a premium rate that reflects their lower risk. Another option could be to offer a multiyear loan that could cover both mitigation measures and the annual loan cost./105 Vouchers could also be used to help policyholders cover the cost of repaying mitigation loans./106 This approach could potentially be targeted at properties that are most costly to the NFIP, such as repetitive loss/107 (RL) and severe repetitive loss (SRL) properties.

The Build Back Better Act,/108 as passed by the House on November 19, 2021, would have appropriated $600 million, to remain available until the end of FY2026, for a means-tested affordability program to provide assistance in the form of graduated discounts for insurance costs for covered properties. NFIP policyholders with a household income not more than 120% of AMI would have been eligible to participate in the program. Covered properties were defined as primary residences for structures with one to four families, and primary residences of renters. The affordability assistance would have provided a discount on all premiums, fees, and surcharges.

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101 For example, this could potentially make use of FEMA's National Risk Index, which combines a community's hazard risk, social vulnerability, and resilience to calculate a relative risk assessment. See FEMA, National Risk Index for Natural Hazards (NRI), https://www.fema.gov/flood-maps/products-tools/national-risk-index.

102 NRC Affordability Report 1, p. 95.

103 NRC Affordability Report 1, p. 90.

104 GAO Affordability Assistance, p. 17.

105 Howard Kunreuther, "Improving the National Flood Insurance Program," Behavioural Public Policy, July 9, 2018, pp. 1-15.

106 GAO Affordability Assistance, p. 46.

107 The statutory definition of a repetitive loss structure is a structure covered by a contract for flood insurance that (a) has incurred flood-related damage on two occasions, in which the cost of repair, on the average, equaled or exceeded 25% of the value of the structure at the time of each such flood event; and (b) at the time of the second incidence of flood-related damage, the contract for flood insurance contains increased cost of compliance coverage. See 42 U.S.C. Sec.4121(a)(7).

108 H.R. 5376, as passed by the House on November 19, 2021.

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Reduce the Amount That Policyholders Pay to the NFIP

A means-tested affordability program is only one possible way of reducing the cost burden to policyholders, and Congress could consider other changes to the NFIP to reduce the amount that policyholders pay.

Options to Reduce the Amount That Policyholders Pay to the NFIP

4. Reduce cross-subsidies. Cross-subsidies are being phased out under Risk Rating 2.0. This should reduce premiums for policyholders who are paying more to cross-subsidize other policyholders. However, premiums for properties that are currently subsidized are expected to increase as cross-subsidies are reduced. Alternatively, the income to the NFIP will be reduced if the costs that are currently cross-subsidized are not passed on to other policyholders.

5. Reduce or eliminate fees or surcharges paid by NFIP policyholders. This would reduce flood insurance premiums but would also reduce income to the NFIP. Reduced fees and surcharges might encourage additional participation in the NFIP. However, FEMA does not have authority to eliminate all of these; elimination of some fees and surcharges/109 would require action by Congress.

6. Reduce premiums or increase subsidies. This could reduce the amount that policyholders pay to the NFIP but would also reduce income to the program unless Congress were to provide additional funding for the NFIP. In addition, increasing subsidies would run counter to the principles established by FEMA for Risk Rating 2.0.

7. Eliminate the mandatory purchase requirement. If the purchase of flood insurance were voluntary, those who could not afford NFIP premiums would not have to incur the expense. However, it is likely that take-up rates for NFIP policies would drop substantially if homeowners were not required to purchase flood insurance./110 As a result, households would need to rely on their own financial resources or federal assistance for post-flood recovery. In addition, the presence of uninsured properties may reduce the resilience of a community more generally after a flood and may necessitate additional disaster assistance from the federal government.

8. Allow higher deductibles on NFIP policies. The maximum deductible is currently $1,250 if the building coverage amount exceeds $100,000. Otherwise, the deductible is $1,000.111 Congress could increase the maximum deductible or FEMA could encourage policyholders to choose a larger deductible.112 According to FEMA, increasing the deductible to the maximum amount could reduce NFIP premiums by 40%.113 However, although higher deductibles could decrease premium payments, in the event of a flood they might impose hardships on people. This could be a particular problem for low-income households who must pay for damage below the deductible amount, and could lead to an increase in demand for federal disaster assistance.

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109 For example, the Federal Policy Fee, Reserve Fund Assessment, and the HFIAA surcharge.

110 NRC Affordability Report 1, p. 113.

111 FEMA, Flood Insurance Manual, 3. How to Write, p. 3-42, revised October 1, 2022, https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-full-manual_102022.pdf.

112 CBO Affordability, p. 26.

113 FEMA, Help Clients Pay Less for Flood Insurance, https://agents.floodsmart.gov/retention/costs.

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9. Cap the rate at which NFIP premiums could increase. The current maximum rate of allowable increase was set in HFIAA, with maximum rate increases for primary residences limited to 5%-18% per year. Premiums on other categories of properties can be increased at 25% annually./114 Congress could set a lower cap on the rate at which premiums can be increased./115

10. Cap NFIP premiums. This could establish a ceiling beyond which premiums could not increase, and thus could help lower premiums of policyholders whose premiums are increasing./116 However, this approach does not consider policyholders' income, assets, or other expenses and therefore does not necessarily take financial need into account.

11. Allow communities to pay all or part of flood insurance premiums for their residents. Community payment of individual policyholders' flood insurance premiums could shift the issue of affordability to the local level and allow each community to address it in the way that it sees fit. For example, a community could cross-subsidize the assessment of premiums, or use other community funds to offset high premiums for low-income or moderate-income households. A community could also recover all or part of the costs through measures such as special assessments levied on covered properties.

Increase NFIP Participation

A long-standing objective of the NFIP has been to increase purchases of flood insurance policies, and this objective was one motivation for keeping NFIP premiums affordable when the program was established./117 In designing the NFIP to help address floodplain management objectives, Congress has generally emphasized the need for high policy take-up rates./118 Adding new policyholders, however, would not improve the finances of the NFIP unless the new policies increase receipts more than they increase expected claims and other expenses./119 GAO has noted that increased consumer participation could increase the size and scope of the NFIP and potentially increase federal fiscal exposure. However, it suggested, this could be reduced by implementing full-risk rates and balanced by an increasing number of lower-risk properties./120

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114 See the section of this report on "Risk Rating 2.0" for further information on the rates at which premiums can be increased.

115 For example, S. 3128 and H.R. 5802 in the 117th Congress would cap annual premium increases at 9%.

116 In the first year of Risk Rating 2.0, FEMA has capped the annual premium for a single-family primary residence at $12,125. Some of these properties have previously been paying as much as $45,925. This represents the first time that a dollar cap has been applied to the NFIP. FEMA, Briefing on Risk Rating 2.0 for CRS, March 29, 2021.

117 See 82 Stat. 577 for text in the original statute (Section 1308(b)(2) of P.L. 90-448). This language remains in statute; see 42 U.S.C. Sec.4015(b)(2).

118 NRC Affordability Report 1, p. 31.

119 CBO Affordability, p. 24.

120 GAO Solvency, p. 33.

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The Mandatory Purchase Requirement

Over time, the desire to increase take-up rates has led to a number of program changes, including the introduction of the mandatory purchase requirement (MPR). In a community that participates or has participated in the NFIP, owners of properties in the mapped SFHA are required to purchase flood insurance as a condition of receiving a federally backed mortgage. Under the MPR, federally backed or regulated lenders require borrowers to purchase and maintain a flood insurance policy when they provide a mortgage to properties in the SFHA. The MPR is enforced by lenders rather than FEMA, and FEMA does not have authority to enforce lender compliance with the MPR./121 At least 10 federal entities oversee lenders' compliance./122

Compliance with the MPR directly affects the number of properties that have flood insurance, although the full extent of noncompliance with the MPR is not known./123 However, NFIP take-up rates for flood insurance are generally low, even in areas subject to the MPR,/124 and policies may not be maintained after purchase. For example, GAO found that about 28% of properties that were purchased in 2014 no longer had an NFIP policy by 2019./125

There is a large flood insurance gap in the United States, and many people that are exposed to flood risk are not covered by flood insurance. Currently the NFIP insures about 4.985 million structures in the United States,/126 and most of the remaining structures have no insurance to protect them from flood risk./127 NFIP residential policies are nearly evenly divided between areas inside and outside the SFHA, but the majority of nonresidential policies are inside the SFHA. This is relevant to flood insurance affordability because flood insurance premiums are generally higher in SHFAs./128 Expanding the MPR could increase premiums and create affordability concerns that could warrant having an affordability assistance program./129

In addition to the risk of uninsured losses to individual households and businesses, the NFIP could achieve greater financial stability with a wider policy base; in particular, through finding ways to increase coverage outside the SFHA. According to the American Academy of Actuaries, increasing the number of properties covered for flood, particularly in lower-risk areas, will not only protect consumers, lending institutions, and local communities, but will also improve the financial stability of the NFIP by achieving a better spread of risk./130

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121 GAO, GAO Mandatory Purchase Requirement, p. 9.

122 GAO Mandatory Purchase Requirement, p. 4 and p. 10.

123 GAO Mandatory Purchase Requirement, p. 35 and p. 45.

124 Carolyn Kousky, Howard Kunreuther, Michael LaCour-Little, et al., "Flood Risk and the U.S. Housing Market," Journal of Housing Research, vol. 29, no. S.1 (November 30, 2020), pp. S3-S24.

125 GAO Mandatory Purchase Requirement, p. 32.

126 FEMA, Watermark, FY2021, Third Quarter, https://www.fema.gov/sites/default/files/documents/fema_fimawatermark-FY2021-Q3.pdf.

127 American Academy of Actuaries, The National Flood Insurance Program: Challenges and Solutions, Washington, DC, September 25, 2019, p. 4, https://www.actuary.org/sites/default/files/2019-09/flood9.19.pdf.

128 FEMA Affordability Framework, p. 8.

129 FEMA Affordability Framework, p. 43.

130 American Academy of Actuaries, The National Flood Insurance Program: Challenges and Solutions, Washington, DC, September 25, 2019, p. 82, https://www.actuary.org/sites/default/files/2019-09/flood9.19.pdf.

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Options to Increase NFIP Participation

12. Ensure full compliance with the mandatory purchase requirement. This option would require lenders to ensure that all mortgagees subject to the MPR purchase and maintain flood insurance. GAO's view is that measuring compliance with the MPR would require property-specific data on mortgage, flood zone determinations, and flood insurance policies compiled at loan origination and at various points during the life of the loan. GAO noted that this would entail establishing reporting requirements on lenders to provide relevant mortgage data, determining an appropriate authority to receive and compare these data, and determining the costs and benefits of obtaining these data./131 In a recent report, GAO described challenges to understanding the full extent of noncompliance with the MPR./132 Given the absence of a full understanding of compliance with the MPR, GAO suggested that there were a number of actions that FEMA could take, despite FEMA's limited statutory role related to the MPR, to examine trends and patterns related to consumer participation and potential noncompliance. Policy and claims data could be used to develop strategies for addressing noncompliance. For example, GAO recommended that FEMA could review its own data to identify patterns and trends and to develop policies for addressing noncompliance. In particular, an analysis of NFIP policy data could provide information on how long NFIP policies are maintained over time and when flood insurance policies are dropped. Further, an examination of the number and cost of claims associated with the policies that were dropped could help FEMA to understand some of the financial effects that noncompliance may be having on both consumers and the federal government. Finally, analysis of FEMA's policy data could provide information on the effectiveness of changes to the MPR, such as escrow requirements, in ensuring policies are maintained for the life of mortgage loans./133

13. Require policyholders subject to the MPR to opt out rather than opt in. Research in behavioral economics has found that, in many circumstances, individuals tend to stay with default options. It has been suggested that coupling flood insurance to homeowners' insurance as a default, while still giving individuals the option to decline coverage (opt out) if not required by the lender, might lead more people to purchase flood insurance./134

14. Offer multiyear flood insurance policies. The tendency to maintain the status quo is thought to increase the likelihood that insured individuals will maintain a multiyear policy for the length of the contract, whereas they may decide not to renew an annual policy after it expires./135

15. Expand the MPR to all structures with federally backed mortgages in NFIP communities, not just those in the SFHA. Both GAO and FEMA have suggested that the MPR could potentially be expanded to more (or all) mortgage loans made by federally regulated lending institutions for properties in communities participating in the NFIP. This would increase the consumer participation rate in the NFIP and potentially balance the NFIP portfolio with an increased number of lower-risk properties./136 According to GAO, some private insurers have indicated that such a federal mandate could help achieve the level of consumer participation necessary to make the private sector comfortable with providing flood insurance coverage by increasing the number of policyholders, which would allow private insurers to diversify and manage the risk of their flood insurance portfolio and address concerns about adverse selection./137

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131 GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown, GAO-02-39-6, June 21, 2002, p. 4, https://www.gao.gov/products/GAO-02-396.

132 GAO Mandatory Purchase Requirement, p. 29.

133 GAO Mandatory Purchase Requirement, pp. 31-32.

134 Carolyn Kousky, Brett Lingle, Howard Kunreuther, et al., Moving the Needle on Closing the Flood Insurance Gap, Wharton Risk Management and Decision Processes Center, Issue Brief, Philadelphia, PA, February 13, 2019, p. 2, https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Moving-the-Needle-on-Closing-the-FloodInsurance-Gap.pdf.

135 NRC Affordability Report 1, p. 62.

136 GAO Solvency, p. 29 and p. 33.

137 GAO, Flood Insurance: Strategies for Increasing Private Sector Involvement, GAO-47-127, January 2014, p. 23, https://www.gao.gov/products/GAO-14-127.

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This would require congressional action to change the provision in the National Flood Insurance Act of 1968 that links the purchase of flood insurance to financial assistance./138 Congressional action would not be needed to change the definition of an "area having special flood hazards," which is only defined in regulation/139 rather than in statute. This option would also require lenders to enforce the expanded MPR.

16. Expand the MPR to all structures in the SFHA, not just those with federally backed mortgages. The Association of State Floodplain Managers suggested that all properties within the SFHA should be required to have flood insurance, not just those with federally backed mortgages./140 This would require every homeowner and business mapped into the SFHA to purchase flood insurance, whether or not they have a mortgage. This would require congressional action to change the provision in the NFIA that links the purchase of flood insurance to financial assistance in any area identified by the FEMA administrator as an area having special flood hazards./141 This option would also require lenders to enforce the expanded MPR, or require the introduction of another method of enforcement.

17. Require all structures in the floodplain (both the 1%-annual-chance floodplain and the 0.2%-annual-chance floodplain) to purchase flood insurance. This would require all structures in the wider floodplain to purchase flood insurance. Currently, properties outside the SFHA are not required to purchase flood insurance but may voluntarily purchase a lower-cost NFIP policy. According to FEMA, on average about 40% of NFIP claims come from properties outside the SFHA./142

18. Base the MPR on property-level expected damages instead of the boundary of the SFHA. This approach could, for example, require the purchase of flood insurance for any properties with expected losses above a defined amount.

19. Offer community flood insurance policies. A community insurance option would allow a community to purchase a group flood insurance policy on behalf of all properties that are at risk of flooding. The community would pay a single premium for the group policy. Community insurance would increase take-up rates by automatically insuring all members of a participating community. This could potentially exacerbate affordability problems by forcing all members of a community to pay flood insurance premiums. However, if Congress believes that community flood insurance should be encouraged, it could choose to provide funds in order to offer discounted premiums, or to offer coverage to all properties in both the 1%-annual-chance floodplain and the 0.2%-annual-chance floodplain in order to promote resilience./143

20. Require all homeowners and businesses that receive disaster assistance for flood damage to obtain and maintain flood insurance. This requirement is already in place for properties that receive FEMA Public Assistance, FEMA Individuals and Households Program assistance, and Small Business Administration Disaster Loans. Recipients of funding from these programs are required to obtain and maintain flood insurance as a condition of receiving future disaster assistance for a flood event, or forfeit future disaster assistance for flooding. Similar requirements could be introduced for all residential and commercial properties that receive disaster assistance for flooding.

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138 42 U.S.C. Sec.4012a(a).

139 44 C.F.R. Sec.59.1.

140 Association of State Floodplain Managers, Inc., Rethinking the NFIP, ASFPM Comments on NFIP Reform, January 11, 2011, p. 5, http://www.floods.org/ace-files/documentlibrary/National_Policy/Rethinking_the_NFIP_Comments_from_ASFPM_1-11-11.pdf.

141 42 U.S.C. Sec.4012a(a).

142 FEMA, Answers to Questions About the NFIP, p. 51, https://agents.floodsmart.gov/sites/default/files/fema-answersto-questions-about-the-NFIP.pdf.

143 See, for example, Carolyn Kousky and Leonard Shabman, A Proposed Design for Community Flood Insurance, Resources For the Future, Washington, DC, December 2015, pp. 21-23, https://media.rff.org/archive/files/document/file/RFF-Rpt-KouskyShabman-CommunityFloodIns.pdf.

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Increase NFIP Income

The NFIP is different from other disaster assistance in that it is not directly funded by taxpayers. The majority of the NFIP's income is provided by policyholders' premiums, fees, and surcharges, which are used to pay claims for covered flood damages. In addition, there are charges added to the premium to cover the administrative costs of the program, including claims handling by private insurers, and to build up a financial reserve to cover catastrophic-loss years. As the NFIP currently operates, rates for full risk-based policies are intended to cover the expected cost associated with all potential flood events, including less likely, high-cost events./144

The NFIP has three sources of funding: (1) premiums, fees, and surcharges from NFIP policyholders; (2) annual appropriations for some of the costs of flood mapping; and (3) borrowing from the U.S. Treasury when the balance of the National Flood Insurance Fund (NFIF) has been insufficient to pay claims. The only continuing direct appropriations to the NFIP are to supplement floodplain mapping activities; the remainder of flood mapping costs are paid by NFIP policyholders through the Federal Policy Fee (FPF). According to FEMA, in FY2020, 36.4% of spending on flood mapping came from the FPF and 63.6% from appropriations./145 In recent years, appropriations to the NFIP for flood mapping have varied between $100 million and $275.5 million, an amount that represented 2.1% to 5.8% of the NFIP's income. These appropriations amounted to $1.79 billion between FY2015 and FY2021./146

In contrast, for example, the federal crop insurance program has permanent, indefinite funding authority: annual funding comes from both mandatory and discretionary appropriations./147 The average cost of the program is projected at nearly $8 billion per year for FY2021 to FY2025 and to remain around that level for FY2026 to FY2030./148 On average, the federal government pays roughly 60% of agricultural producers' insurance premiums./149 CBO projects that the federal crop insurance program will cost almost $40 billion for the five-year period FY2021 to FY2025 and more than $80 billion for the 10-year period FY2021 to FY2030./150

Because close to 95% of the NFIP's costs are borne by policyholders, anything that increases NFIP income from sources other than policyholders, or that reduces NFIP costs paid by policyholders, ultimately reduces the amount that NFIP policyholders have to pay. In addition to paying NFIP claims, policyholders also pay the costs of many noninsurance activities in the public interest, such as flood mitigation grants and floodplain mapping and management./151

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144 CBO Affordability, p. 26.

145 Email from FEMA Congressional Affairs staff, January 25, 2021.

146 See Table 5 in CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by Diane P. Horn and Baird Webel.

147 For more information, see CRS Report R46686, Federal Crop Insurance: A Primer, by Stephanie Rosch.

148 Ibid., pp. 3-4.

149 CBO, USDA Mandatory Farm Programs--CBO's Baseline as of March 6, 2020, March 19, 2020, p. 1, https://www.cbo.gov/system/files/2020-03/51317-2020-03-usda.pdf.

150 Ibid., p. 24.

151 For example, in FY2022 NFIP policyholders paid $199 million for floodplain management and flood mapping and $175 million on flood mitigation assistance. See Table 5 in CRS Report R44593, Introduction to the National Flood Insurance Program (NFIP), by Diane P. Horn and Baird Webel.

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The benefits of such tasks are not directly measured in the NFIP's financial results from underwriting flood insurance./152 One way to reduce NFIP policyholders' cost burden would be for the federal government to pay some of the costs that are currently paid for by NFIP policyholders./153 CBO noted that, like debt service, mapping and mitigation costs are not related to current NFIP policies, and suggested that Congress could shift those costs to taxpayers by funding those activities out of general revenue./154

Options to Increase NFIP Income

21. Charge actuarially sound rates for all policies and/or increase fees and surcharges. Subsidies are being phased out under Risk Rating 2.0, but further reform of the rating system could be considered. This could be done by eliminating all subsidies or increasing the rate at which subsidies are phased out. Policyholders who are cross-subsidizing other policies could benefit from this. However, as long as the NFIP is primarily funded by policyholders, such an action could increase premiums for other policyholders.

22. Reduce the number of Repetitive Loss and Severe Repetitive Loss properties. To the extent that other NFIP policyholders are subsidizing RL and SRL properties, reducing the number of such properties, either through mitigation or other means, could reduce the cross-subsidy paid by other NFIP policyholders and thus their premiums.

23. Prioritize sales of policies that are more likely to contribute to a net surplus. CBO has suggested that FEMA could be directed to increase its marketing and publicity efforts, and to prioritize sales of particular types of policies; for example, commercial and nonresidential properties that pay a higher HFIAA surcharge./155 CBO noted that the success of such an approach would depend on FEMA's ability to target the growth in policies./156 24. Increase appropriations to the NFIP. The only direct annual appropriations for the NFIP are for a portion of the costs of the mapping and risk analysis program. Congress could appropriate additional funding to the NFIP, which would reduce the amount that policyholders would have to pay to cover the costs of the program./157

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152 American Academy of Actuaries Flood Insurance Work Group, The National Flood Insurance Program: Challenges and Solutions, April 2017, p. 79, http://www.actuary.org/files/publications/FloodMonograph.04192017.pdf.

153 The Infrastructure Investment and Jobs Act (IIJA), P.L. 117-58, in appropriated $3.5 billion for the Flood Mitigation Assistance (FMA) grant program, with $700 million for each of FY2022 to FY2026. NFIP policyholders contributed an additional $100 million towards the FMA program in FY2022. See Department of Homeland Security (DHS), Notice of Funding Opportunity (NOFO), Fiscal Year 2022 Flood Mitigation Assistance, August 5, 2022, p. 6, https://www.fema.gov/sites/default/files/documents/fema_fy22-fma-nofo_08052022_0.pdf.

154 CBO Affordability, p. 26.

155 For information on the HFIAA surcharge, see the section in this report on "Fees and Surcharges." 156 CBO Affordability, p. 24.

157 See the discussion of the Infrastructure Investment and Jobs Act, P.L. 117-58, in point 36 in the section of this report on "Options to Encourage Community-Level Flood Risk Reduction Measures."

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Continues with Part 3 of 3

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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R47000