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

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Reduce NFIP Debt

The NFIP was not designed to retain funding to cover claims for truly extreme events; instead, the National Flood Insurance Act of 1968 allows the program to borrow money from the Treasury for such events. For most of the NFIP's history, the program has generally been able to cover its costs, borrowing relatively small amounts from the Treasury to pay claims and then repaying the loans with interest. Currently, Congress has authorized FEMA to borrow no more than $30.425 billion from the U.S. Treasury to operate the NFIP./158 The NFIP currently has $9.9 billion of remaining borrowing authority./159

The NFIP was forced to borrow heavily to pay claims in the aftermath of three catastrophic flood seasons - the 2005 hurricane season (particularly Hurricanes Katrina, Rita, and Wilma), Hurricane Sandy in 2012, and the 2017 hurricane season (Hurricanes Harvey, Irma, and Maria)./160 On October 26, 2017, Congress cancelled $16 billion of NFIP debt, making it possible for the program to pay claims for Hurricanes Harvey, Irma, and Maria./161 This represents the first time that NFIP debt has been cancelled. The NFIP has not borrowed from the Treasury since November 2017.

Only current and future participants in the NFIP are responsible for repaying NFIP debt, as the insurance program itself owes the debt to the Treasury and pays for accruing interest on that debt through the premium revenues of policyholders. Under its current authorization, the only means the NFIP has to pay off the debt is through the accrual of premium revenues in excess of outgoing claims, and from payments made out of the Reserve Fund./162

Reducing NFIP debt could lessen the need to raise premiums to pay interest and principal on existing debt. For example, from FY2006 to FY2016 (i.e., since the NFIP borrowed funds following Hurricane Katrina), the NFIP has paid $2.82 billion in principal repayments and $5.62 billion in interest to service the debt through the premiums collected on insurance policies./163 Currently the NFIP is paying over $400 million a year - over $1 million in interest per day--on the debt accrued from past events./164 For example, the NFIP paid $438 million in interest in FY2020/165 and $418 million in FY2019./166 CBO estimated that retiring the debt would require increasing annual payments from policyholders. For example, paying off the debt over 30 years at an interest rate of 2.5% would entail annual payments of roughly $1.2 billion for principal and interest./167

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158 P.L. 113-1.

159 FEMA, Watermark, FY2022, Third Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22-q3watermark.pdf.

160 For details of NFIP borrowing, see CRS Insight IN10784, National Flood Insurance Program Borrowing Authority, by Diane P. Horn.

161 P.L. 115-72, Title III, Sec.308.

162 42 U.S.C. Sec.4017a.

163 FEMA, Watermark, FY2022, Third Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22-q3watermark.pdf.

164 FEMA, National Flood Insurance Program Debt Repayment Report as of September 30, 2019, September 15, 2020, p. 10. Provided to CRS by FEMA Congressional Affairs Staff, January 4, 2020.

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

166 FEMA, National Flood Insurance Program Debt Repayment Report as of September 30, 2019, September 15, 2020, p. 10. Provided to CRS by FEMA Congressional Affairs Staff, January 4, 2020.

167 CBO Affordability, p. 26.

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In addition to charging policyholders enough to pay for their current risk of flood losses, FEMA has collected a reserve fund assessment since 2012, and an additional surcharge from all NFIP policyholders since 2014 to help repay program debt. This creates a potential inequity because policyholders are charged not only for the flood losses that they are expected to incur, but also for losses incurred by past policyholders. Charging current policyholders for debt incurred in past years runs contrary to generally accepted actuarial principles and private insurers' pricing practices./168 According to actuarial principles, a premium rate is based on the risk of future losses and does not include past costs. For example, if in prior years a private insurance company's claims payments had exceeded the premiums collected, it would not recall those payments from current or future policyholders./169

GAO has considered the option of eliminating FEMA's debt to the Treasury, suggesting that if the debt were eliminated, FEMA could reallocate funds used for debt repayment for other purposes such as building a reserve fund and program operations, and arguing that this would also be more equitable for current policyholders and consistent with actuarial principles./170 CBO suggested that forgiving the NFIP's debt would eliminate the need for large premium increases that would otherwise be required to repay the debt./171

An affordability report by the National Research Council (NRC) of the National Academy of Sciences considered the option of forgiving all or part of the NFIP debt within a larger affordability context, suggesting that after forgiving all or part of the NFIP debt, Congress could designate the Treasury as reinsurer for the NFIP. It proposed that Congress could, for example, explicitly state that when the total annual losses in the NFIP exceeded some designated threshold (e.g., $2 billion to $6 billion, perhaps on the basis of the average of non-catastrophic historical claims years), the Treasury could provide funds for the NFIP to honor all claims. The funds could be provided through the Disaster Relief Fund and, if needed, by an emergency supplemental appropriation. The NRC suggested that, taken together, those two actions could result in lower NFIP premiums, enhance affordability, and in turn lead to less spending on disaster assistance.

This would incur occasional costs by designating the Treasury as the source of funds for payment of claims above the defined threshold in high-loss years but would not need to draw on the Treasury each year to provide assistance to policyholders who face unaffordable premiums./172 The Build Back Better Act, as passed by the House on November 19, 2021, would have cancelled the full $20.525 billion debt owed by the NFIP to the Treasury and directed FEMA to spend an amount equal to the interest that the NFIP would have paid in servicing the cancelled debt for flood mapping in FY2022 and FY2023. FEMA's legislative proposals for the NFIP also suggested cancelling the NFIP debt./173

Options to Reduce NFIP Debt

25. Eliminate NFIP interest payments to Treasury. The NFIP is currently paying over $400 million a year in interest./174 If these interest payments were eliminated, this money could be made available to reduce NFIP premiums, fund additional mitigation measures, or fund other actions that could benefit NFIP policyholders./175

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168 GAO Solvency, p. 16.

169 Ibid.

170 Ibid.

171 CBO Affordability, p. 26.

172 NRC Affordability Report 1, pp. 110-111.

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

174 For example, the NFIP paid $415 million in interest in FY2019 and $438 million in FY2020. See FEMA, Watermark, FY2021, Third Quarter, https://www.fema.gov/sites/default/files/documents/fema_fima-watermarkFY2021-Q3.pdf.

175 For example, S. 3128 and H.R. 5802 in the 117th Congress would prohibit the Treasury from charging interest to the NFIP for the five-year period beginning on the date of enactment.

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26. Cancel all or part of NFIP debt. Eliminating the NFIP debt would require Congress to cancel debt outright, to appropriate funds for FEMA to repay the debt, or to change the law to eliminate the requirement that FEMA repay the accumulated debt./176 GAO has suggested that if FEMA's debt to the Treasury were eliminated, FEMA could reallocate funds used for debt repayment for other purposes such as building a reserve fund for catastrophic-loss years and/or program operations, which would arguably be more equitable for current policyholders./177

27. Change the way that losses from catastrophic storms are financed. If Congress were to authorize supplements from the Treasury to be used for making NFIP claims payments in catastrophic-loss years, this would reduce the cost to policyholders in paying these claims. For example, FEMA's report to Congress on privatization of the NFIP concluded that it is difficult to imagine a practical system of flood insurance in which there is not some level of government involvement in the flood risk financing chain. The report argued that when low-frequency, high-magnitude events occur, the government will ultimately play a role in paying for the economic costs associated with a catastrophic flood, whether or not it chooses to underwrite the risk./178 The NFIP currently has no financial structure in place, other than borrowing from the Treasury, to guarantee it can pay claims from a catastrophic-loss year. The American Academy of Actuaries has argued that neither private insurers nor the NFIP can fully absorb any level of catastrophic loss and continue to operate. It suggested that there is a maximum amount of short-term loss that can be fully funded by NFIP revenue; Congress could set a threshold for the maximum amount of losses that the NFIP would be expected to fund fully. Beyond that threshold, the federal government would assume responsibility for losses./179

28. Purchase additional reinsurance. The purchase of private market reinsurance/180 reduces the likelihood of FEMA needing to borrow from the Treasury to pay claims./181 In addition, as GAO noted, reinsurance allows FEMA to price some of its flood risk up front through the premiums it pays to the reinsurers rather than borrowing from Treasury after a flood./182 From a risk management perspective, using reinsurance to cover losses in only the more extreme years could help the federal government manage and reduce the volatility of its losses over time. Transfer of risk to the private sector through reinsurance, however, is unlikely to lower the overall cost of the NFIP because reinsurers understandably charge premiums to compensate for the risk they assume. The primary benefit of reinsurance is to transfer and manage risk rather than to reduce the NFIP's long-term fiscal exposure,/183 and the purchase of reinsurance would reduce future debt rather than make the program more affordable at present.

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176 42 U.S.C. Sec.4016.

177 GAO Solvency, p. 16.

178 FEMA, National Flood Insurance Program Report to Congress on Reinsuring NFIP Insurance Risk and Options for Privatizing the NFIP, August 13, 2015, p. 56, http://www.floods.org/ace-files/documentlibrary/2012_NFIP_Reform/Reinsuring_NFIP_Insurance_Risk_and_Options_for_Privatizing_the_NFIP_Report.pdf.

179 American Academy of Actuaries Flood Insurance Work Group, The National Flood Insurance Program: Challenges and Solutions, April 2017, pp. 28, 31, and 80, http://www.actuary.org/files/publications/FloodMonograph.04192017.pdf.

180 Reinsurance is defined as a transaction between a primary insurer and another licensed (re)insurer where the reinsurer agrees to cover all or part of the losses and/or loss adjustment expenses of the primary insurer. See National Association of Insurance Commissioners, Glossary of Insurance Terms, http://www.naic.org/consumer_glossary.htm#R.

181 FEMA began large-scale purchases of reinsurance in 2017. The specifics of each reinsurance purchase has varied, but in general, the reinsurance has been designed to pay a certain percentage of the losses from a single, large-scale event, with a higher percentage if losses are higher. See FEMA, National Flood Insurance Program's Reinsurance Program, https://www.fema.gov/flood-insurance/work-with-nfip/reinsurance.

182 GAO Solvency, p. 19.

183 Ibid.

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Reduce Flood Damage Through Mitigation

FEMA defines mitigation as any sustained action to reduce or eliminate long-term risk to both people and property from natural hazards and their effects./184 Flood mitigation creates safer communities and can save money for individuals and taxpayers. The importance of FEMA's Hazard Mitigation Assistance (HMA) programs is illustrated by research findings that for every $1 invested by FEMA in flood mitigation between 1993 and 2003, society as a whole saved $7 due to reduced future flood losses./185 If mitigation actions lead to lower damages and lower expected claims, they could make NFIP policies less expensive for households that implement them. An affordability program could be linked to mitigation loans or grants to reduce flood risk over time./186 For example, homeowners could receive a loan or grant to make their property more resistant to flood damage, which could reduce flood risk and lower the cost of flood insurance premiums.

GAO suggested that instead of premium assistance, it would be preferable to address affordability by providing assistance for mitigation measures that would reduce flood risk and enhance resilience, and ultimately result in a lower premium rate./187 GAO has suggested on numerous occasions that increasing mitigation activities would help to reduce flood risk and financial exposure,/188 including suggesting that FEMA could make mitigation activities mandatory, in conjunction with targeted financial assistance for policyholders./189 In addition, property-level mitigation measures can reduce NFIP policyholders' premiums significantly. For example, FEMA estimates that elevating a property in the SFHA one foot above Base Flood Elevation (BFE) could result in a 30% reduction in annual premiums./190 The Association of State Floodplain Managers calculated that elevating a property one foot above BFE could reduce annual flood insurance premiums by over $1,000, while elevating a property two or three feet above BFE could reduce premiums by over $1,400 and $1,500, respectively./191 Insurance provisions could also provide incentives to limit flood damage by rewarding well-designed buildings with lower premiums, lower deductibles, or higher coverage limits. These incentives could also be made available to existing properties that implement new flood mitigation measures.

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184 FEM, Hazard Mitigation Assistance Guidance, Washington, DC, February 27, 2015, p. 1, https://www.fema.gov/sites/default/files/2020-07/fy15_HMA_Guidance.pdf.

185 National Institute of Building Sciences, Natural Hazard Mitigation Saves: 2019 Report, Washington, DC, 2019, p.

37, https://www.nibs.org/files/pdfs/NIBS_MMC_MitigationSaves_2019.pdf. Note that the widely cited figure that $1 spent from federal grants saves $6 in future losses is an average across five hazards: riverine flood, hurricane surge, wind, earthquake, and wildland-urban interface fire. The study did not have enough data to calculate a benefit-cost ratio for federal grants for hurricane surge, but the benefit-cost ratio for federal grants for riverine flood is 7:1.

186 GAO Solvency, p. 43.

187 Ibid.

188 See, for example, GAO Solvency, p. 25.

189 GAO, Flood Insurance: More Information Needed on Subsidized Properties, GAO-13-607, July 3, 2013, p. 38, https://www.gao.gov/products/gao-13-607.

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

191 Association of State Floodplain Managers, The Costs & Benefits of Building Higher, June 30, 2017, p. 2, https://www.lfma.org/assets/docs/Benefits-and-Costs-of-Freeboard-flyer-6-30-17.pdf. Note that these estimates are for a single-family house, one floor, slab on grade foundation, with $200,000 of building coverage, $80,000 in contents coverage, and $1,000 deductible, at 2017 prices.

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The NFIP offers three programs that encourage individuals or communities to reduce flood risk: Increased Cost of Compliance coverage, the Community Rating System, and the Flood Mitigation Assistance (FMA) grant program. These programs are funded by premiums, fees, and surcharges paid by NFIP policyholders. Reducing flood risk should lead to fewer NFIP claims over time and less financial support from NFIP policyholders. In addition, protection against flooding is in itself a benefit for households. Owners of mitigated properties may realize savings in a number of ways. In particular, they may escape damage during floods and avoid costs of repair and rebuilding.

Another way that the NFIP promotes mitigation is by requiring communities in the NFIP to adopt minimum floodplain management standards. According to FEMA, the program saves the nation an estimated $1.87 billion annually in flood losses avoided because of the NFIP's building and floodplain management regulations./192 Internal FEMA studies have found that structures built to FEMA standards experience 65% less flood damage than structures not built to those standards, saving the nation $2.4 billion in avoided flood losses each year and $100 billion over the past 40 years./193

Communities play a key role in mitigating flood risk through planning and building requirements. FEMA does not regulate land use and does not have authority over local development. Rather, it requires participating communities to adopt the minimum NFIP requirements through zoning, floodplain ordinances, and/or building codes. FEMA has set forth these minimum standards in federal regulations./194 Communities are required to adopt these minimum floodplain management standards in order to participate in the NFIP./195 NFIP minimum standards include, among many other conditions, that communities (1) require permits for development in SFHAs; (2) require elevation of the lowest floor of all new residential buildings in the SFHA to be at or above BFE; (3) restrict development in the regulatory floodway to prevent increasing the risk of flooding; and (4) require certain construction materials and methods that minimize future flood damage./196 These requirements apply to new construction in the SFHA.

FEMA issued a request for public comment on revising the NFIP's floodplain management standards in October 2021, in response to a petition submitted by the Natural Resources Defense Council and the Association of State Floodplain Managers./197 FEMA has not updated the NFIP criteria for building and land use in flood-prone areas since they were implemented in 1976,/198 despite growing flood risk and the existence of more protective standards at the state and local levels./199

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192 GAO Solvency, p. 5.

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

194 See 44 C.F.R. Part 60, particularly 44 C.F.R. Sec.60.3.

195 42 U.S.C. Sec.4022(a)(1).

196 44 C.F.R. Sec.60.3.

197 Natural Resources Defense Council and the Association of State Floodplain Managers, Petition Requesting That the Federal Emergency Management Agency Amend Its Regulations Implementing the National Flood Insurance Program, Washington, DC, January 5, 2021, https://www.nrdc.org/sites/default/files/petition-fema-rulemaking-nfip20210105.pdf.

198 FEMA, "Request for Information on the National Flood Insurance Program's Floodplain Management Standards for Land Management and Use, and an Assessment of the Program's Impact on Threatened and Endangered Species and Their Habitats," 86(194) Federal Register 56713-56719, October 12, 2021.

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Property-Level Mitigation

The main source of funding for property-level mitigation measures is Increased Cost of Compliance (ICC) coverage, which is in effect a separate insurance policy to offset the expense of complying with more rigorous building code standards when local ordinances require them to do so. The NFIP requires most policyholders/200 to purchase ICC coverage. ICC coverage is authorized in law, and rates for the coverage, as well as how much can be paid out for claims, are set by FEMA./201 The ICC policy has a separate rate premium structure and provides an amount up to $30,000 in payments for certain eligible expenses. For example, ICC claims payments may be used toward the costs of elevating, demolishing, relocating, or flood-proofing nonresidential buildings, or any combination of these actions. According to ICC data, elevation is the most common form of mitigation./202 Although the cost of elevating a structure depends on the type of building and elevation requirement, the average cost of elevating an existing property has been estimated at $33,239 to $91,732,/203 and suggestions have been made for years that the amount of ICC coverage should be raised./204

At the household level, there are currently few mitigation actions that lower premiums. The most commonly used interventions are structural elevation and flood-proofing (under certain circumstances)./205 However, even with the potential benefits of reduced future losses and decreased premiums, mitigation activities often require large upfront costs. Such risk reduction measures may be too expensive for many policyholders, and additional sources of funding may be needed, such as mitigation grants or loans. Such products could take the form of a stand-alone program or could be used in conjunction with other affordability approaches. The type of support for property-level mitigation activities could also be mixed: for example, grants could be made available for lower-income or cost-burdened households, and loans made available to households above this threshold.

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199 Natural Resources Defense Council and the Association of State Floodplain Managers, Petition Requesting That the Federal Emergency Management Agency Amend Its Regulations Implementing the National Flood Insurance Program, Washington, DC, January 5, 2021, p. 48, https://www.nrdc.org/sites/default/files/petition-fema-rulemaking-nfip20210105.pdf.

200 For example, ICC coverage is not required on condominium units and content-only policies.

201 42 U.S.C. Sec.4011(b).

202 See, for example, FEMA, NFIP: Use of Increased Cost of Compliance Coverage, FY2009 Report to Congress, October 2009, p. 6. Report provided to CRS by FEMA Congressional Affairs Staff, and Natural Resources Defense Council and the Association of State Floodplain Managers, Petition Requesting That the Federal Emergency Management Agency Amend Its Regulations Implementing the National Flood Insurance Program, Washington, DC, January 5, 2021, p. 48, https://www.nrdc.org/sites/default/files/petition-fema-rulemaking-nfip-20210105.pdf.

203 Aerts, J.C.J.H., Botzen, W.J.W., Moel, H. de, et al., "Cost Estimates for Flood Resilience and Protection Strategies in New York City," Annals of the New York Academy of Sciences, vol. 1294, no. 1 (August 2013), pp. 22-26.

204 See, for example, FEMA, NFIP: Use of Increased Cost of Compliance Coverage, FY2009 Report to Congress, October 2009, p. 32.

205 See FEMA, Flood Insurance Manual, 3. How to Write, p. 3-41, revised October 1, 2022, https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-full-manual_102022.pdf.

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Risk Rating 2.0 currently provides credits for three mitigation actions: (1) installing flood openings according to the criteria in 44 C.F.R. Sec.60.3;/206 (2) elevating onto posts, piles, and piers; and (3) elevating machinery and equipment above the lowest floor./207

Community-Level Mitigation and Floodplain Management Standards

Some additional community-level mitigation measures could lead to lower NFIP premiums by removing properties from the SFHA, reducing the flood risk to individual properties, or by increasing a community's score in the Community Rating System (CRS).

The CRS is a voluntary incentive-based program that rewards communities for adopting floodplain management practices to a higher standard than the NFIP minimum standards by providing reduced-cost flood insurance premiums to policyholders in the community./208 FEMA awards points that increase a community's "class" rating in the CRS on a scale of 1 to 10, with 1 being the highest ranking. Points are awarded for an array of improvements related to how the community informs its public on flood risk, maps and regulates its floodplain, reduces possible flood damage, and provides immediate warnings and responds to flooding incidents./209 Starting at Class 9, policyholders in the SFHA within a CRS community receive a 5% discount on their SFIP premiums, with increasing discounts of 5% per class until reaching Class 1, at which those policyholders can receive a 45% discount.

Options that improve a community's CRS score will directly lower households' premiums by increasing the CRS discount on premiums. In addition, the CRS program provides an average 13.3% discount on SFIP premiums across the NFIP,/210 which is cross-subsidized into the NFIP program, such that the discount for one community ends up being offset by increased premium rates in all communities across the NFIP. Therefore, the average 13.3% discount for CRS communities is cross-subsidized and shared across NFIP communities through a cost (or load) increase of 15.3% to overall premiums./211

The Flood Mitigation Assistance (FMA) Program/212 awards grants for a number of purposes, with the goal of mitigating flood-damaged properties to reduce or eliminate future NFIP claims, particularly from repetitive loss and severe repetitive loss properties. FMA funds mitigation activities such as state and local mitigation planning; the elevation, relocation, demolition, or flood proofing of structures; the acquisition of properties; and other activities./213 FMA funding is available only to communities that participate in the NFIP. FMA grants are not available to individuals, although communities may apply for funding that benefits individual NFIP policyholders.

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206 44 C.F.R. Part 60, Criteria for Land Management and Use, https://www.govinfo.gov/content/pkg/CFR-2012-title44vol1/pdf/CFR-2012-title44-vol1-sec60-3.pdf.

207 See FEMA, Flood Insurance Manual: How to Write, pp. 3-26 to 3-29, revised October 1, 2022, https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-full-manual_102022.pdf.

208 42 U.S.C. Sec.4022(b)(1).

209 For a full listing of possible creditable activities in the Community Rating System, see FEMA, NFIP Community Rating Coordinator's Manual 2017, https://www.fema.gov/media-library-data/1493905477815d794671adeed5beab6a6304d8ba0b207/633300_2017_CRS_Coordinators_Manual_508.pdf.

210 Email correspondence from FEMA Congressional Affairs staff, October 22, 2020.

211 Ibid.

212 42 U.S.C. Sec.4104c.

213 For additional information on the FMA Program, see 44 C.F.R. Part 78, and FEMA's website at https://www.fema.gov/grants/mitigation/floods.

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Providing increased federal funding for FMA could reduce flood risks and thus decrease the contributions to mitigation funding from NFIP policyholders. The annual amount available for FMA from FY2015 through FY2020 has varied between $150 and $200 million./214

The Infrastructure Investment and Jobs Act (IIJA)/215 appropriated $3.5 billion for the FMA program, with $700 million for each of FY2022 through FY2026. This represents a significant increase in the amount of funding available for flood mitigation, and the first time that funding has been appropriated for the FMA program./216

Other mitigation measures that reduce flood risk, particularly at the community level, may not lead directly to a reduction in flood insurance premiums for residents of that community, but may lead to reduced insurance claims, which would benefit NFIP finances as a whole.

Options to Encourage Property-Level Mitigation Activities

29. Provide premium discounts for additional property-level mitigation activities. Congress could require FEMA to identify additional property-level mitigation activities for which NFIP policyholders could receive a reduced premium. To do this, FEMA would need to develop data and analyses that would link the measures' expected reduction in insurance losses to insurance premiums./217

30. Provide grants or loans to allow homeowners and businesses to introduce property-level mitigation activities. This could take the form of increasing funding available through the NFIP FMA program or FEMA's other Hazard Mitigation Assistance programs,/218 or by introducing new grant or loan programs for individuals and businesses. Currently, individuals and businesses cannot apply directly for mitigation funding. Mitigation grants or loans could be targeted to policyholders who meet defined criteria for affordability assistance, or targeted to certain types of properties. For example, mitigation funds could be targeted to those for whom the cost of NFIP premiums creates an affordability challenge, or for whom the cost of carrying out mitigation measures could be prohibitive, or to households that have little access to commercial credit./219 Financial incentives could also be offered to encourage households in flood-prone areas to relocate outside the SFHA.

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

215 P.L. 117-58.

216 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.

217 NRC Affordability Report 1, p. 108.

218 See CRS Insight IN11187, Federal Emergency Management Agency (FEMA) Hazard Mitigation Assistance, by Diane P. Horn.

219 NRC Affordability Report 1, p. 103.

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31. Provide grants or loans targeted at repetitive loss and severe repetitive loss properties. A relatively small number of NFIP properties that are repeatedly flooded contribute disproportionately to NFIP claims. Properties that have suffered multiple flood losses, known as repetitive loss (RL), and severe repetitive loss (SRL) properties are at greater risk than the average property insured by the NFIP. In the past 30 years, one out of every six dollars paid out in NFIP claims has gone to a building with a history of multiple floods; approximately $10.9 billion in claims have been paid on properties with two or more losses, accounting for over 15% of FEMA's total of $70.6 billion claims paid during the same period./220 For such properties, the benefits of reduced flood risk and lower premiums may exceed the costs of mitigation. Targeting mitigation grants and/or loans at RL and SRL properties could reduce both the premiums paid by these policyholders and the overall fiscal risk to the NFIP./221

32. Offer tax deductions or tax credits for mitigation activities. The cost burden of flood mitigation investments could be lowered through tax deductions and tax credits. At various times, Congress has passed legislation to provide tax relief to support recovery following disasters,/222 and such policy tools could be used to encourage mitigation activities. Tax credits generally provide greater financial assistance as they lower the actual amount of tax paid./223 However, neither tax credits nor tax deductions may provide broad relief, and do not necessarily target those in need of financial assistance. Tax credits benefit only those owing tax, unless the credit is refundable and a refund is given if the filer owes less tax than the credit. A tax deduction benefits only those paying income tax, and the value of the deduction depends on the taxpayer's marginal tax rate. In addition, policyholders could face cash flow challenges because they would generally need to pay the full premium before they receive the tax benefit./224

33. Establish tax-deductible disaster savings accounts for mitigation activities. Pre-tax funds placed in disaster savings accounts could be used to cover hazard mitigation investments, or could cover disaster damages or flood insurance premiums. Funds could be contributed pre-tax, and amounts withdrawn for designated uses would not be taxed./225 These accounts could also be used to cover homeowner expenses below their insurance policy deductible. This might encourage homeowners to increase the deductible, which would reduce the NFIP premium for that policy. As with tax deductions, the financial benefit to a household would depend on their marginal tax rate. In addition, a disaster savings account would not help those whose disposable income is not enough to allow them to put funds into a savings account./226

Options to Encourage Community-Level Flood Risk Reduction Measures

34. Improve a community's Community Rating System score. A community could join the CRS or, if already participating in the CRS, carry out additional activities to improve its CRS class rating, thereby increasing the discount that residents receive on their flood insurance premiums. In particular, communities could focus on activities that receive a higher number of points, such as adoption of higher regulatory standards, open space preservation, flood protection, or acquisition and relocation of high-risk properties. For every step that a community's CRS rating increases, residents receive an additional 5% increase in their NFIP premium discount. Congress could also provide greater incentives for communities to participate in the CRS, perhaps by increasing the discounts for CRS class ratings. Congress could provide funding for technical assistance or staffing to small communities to enable them to join and participate in the CRS. Congress could direct FEMA to increase the CRS points for flood damage reduction activities that directly reduce flood risk.

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220 FEMA, "Request for Information on the National Flood Insurance Program's Floodplain Management Standards for Land Management and Use, and an Assessment of the Program's Impact on Threatened and Endangered Species and Their Habitats," 86(194) Federal Register 56713-56719, October 12, 2021.

221 GAO, National Flood Insurance Program: Fiscal Exposure Persists Despite Property Acquisitions, GAO-20-509, June 25, 2020, p. 34, https://www.gao.gov/assets/710/707821.pdf.

222 See CRS Report R45864, Tax Policy and Disaster Recovery, by Molly F. Sherlock and Jennifer Teefy.

223 Ibid.

224 GAO Affordability Assistance, p. 2.

225 GAO Affordability Assistance, pp. 106-107.

226 GAO Affordability Assistance, p. 107.

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35. Encourage the use of green infrastructure and nature-based solutions to reduce flood risk. Nature-based solutions make use of natural processes and ecosystem services for functional purposes, such as living shorelines, where natural habitats such as oyster reefs, mangroves, and salt marshes are used to hold the shoreline in place. FEMA recently elevated the CRS credits for nature-based solutions./227 The number of points awarded for preserving open space is now among the highest given in the CRS. Credits are awarded according to the percentage of open space in a community's floodplain. The larger the percentage, the more credit is awarded./228 Nature-based solutions may also provide benefits beyond mitigating the effects of natural hazards, such as improved water and air quality, healthier natural habitats, and added recreational space.

36. Increase federal funding for flood mitigation. Congress could appropriate funding for NFIP flood mitigation, rather than requiring the FMA program to be funded entirely by NFIP policyholders./229 For example, the IIJA appropriated $3.5 billion for FMA, with $700 million for each of FY2022 through FY2026. Congress could also provide additional funding to other hazard mitigation programs,/230 which could potentially benefit NFIP communities.

37. Increase the federal cost share of mitigation grants. Congress could increase the federal cost share on mitigation grants, and could target this assistance toward particular types of communities. The cost share for the FMA program is usually 75% federal, 25% nonfederal. However, the cost share is 90% federal, 10% nonfederal for repetitive loss properties, and 100% federal for severe repetitive loss properties. Despite this, obtaining funding for the nonfederal cost share may be difficult for some communities, and Congress could increase the federal cost share to make it possible for such communities to carry out mitigation activities. For example, FEMA intends to reduce the FMA cost share for certain disadvantaged communities in FY2022, as part of the Justice40 Initiative,/231 by using the Centers for Disease Control and Prevention (CDC) Social Vulnerability Index (SVI)/232 at the census tract level at a threshold of 0.7501 or greater as a priority scoring criterion./233 In addition, the funding appropriated to FMA under the IIJA will provide a 90% federal cost share for a property that is (1) located in a census tract with a CDC SVI score of not less than 0.5001, or (2) that serves as a primary residence for individuals with a household income of not more than 100% of the applicable area median income.

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227 FEMA, Addendum to the 2017 CRS Coordinator's Manual, January 2021, pp. A-6 to A-9, https://www.fema.gov/sites/default/files/documents/fema_community-rating-system_coordinator-manual_addendum-2021.pdf.

228 FEMA, Building Community Resilience with Nature-Based Solutions: A Guide for Local Communities, Washington, DC, August 6, 2020, p. 18, https://www.fema.gov/sites/default/files/2020-08/fema_riskmap_nature-based-solutionsguide_2020.pdf.

229 The Infrastructure Investment and Jobs Act (IIJA), P.L. 117-58, appropriates $3.5 billion for the NFIP Flood Mitigation Assistance Program, with $700 million for each of FY2022 through FY2026. This represents a significant increase in the amount of funding available for flood mitigation, and the first time that funding has been appropriated for the FMA program. 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-fmanofo_08052022_0.pdf.

230 For more information about FEMA Hazard Mitigation Assistance, see CRS Report R46989, FEMA Hazard Mitigation: A First Step Toward Climate Adaptation, by Diane P. Horn and CRS Insight IN11733, Recent Funding Increases for FEMA Hazard Mitigation Assistance, by Diane P. Horn.

231 Executive Office of the President, Office of Management and Budget, Memorandum for the Heads of Departments and Agencies, M-21-28, Washington, DC, July 20, 2021, p. 12, https://www.whitehouse.gov/wp-content/uploads/2021/ 07/M-21-28.pdf.

232 The Centers for Disease Control and Prevention/Agency for Toxic Substances and Disease Registry (CDC/ATSDR) Social Vulnerability Index (SVI) uses United States Census Data to determine the social vulnerability of every census tract, ranked on 15 social factors. SVI scores range from 0 to 1, with 1 representing the highest level of social vulnerability. For example, a SVI ranking of 0.75 means that 75% of census tracts in the nation are less vulnerable than the tract of interest. See CDC/ATSDR SVI Fact Sheet, https://www.atsdr.cdc.gov/placeandhealth/svi/fact_sheet/fact_sheet.html, and CDC SVI 2018 Documentation, https://www.atsdr.cdc.gov/placeandhealth/svi/documentation/pdf/SVI2018Documentation-H.pdf.

233 DHS, Notice of Funding Opportunity (NOFO), Fiscal Year 2021 Flood Mitigation Assistance, p. 4, https://www.fema.gov/sites/default/files/documents/fema_nofo-fiscal-year-2021-flood-mitigation-assistance-grants.pdf.

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38. Require stronger building codes for new buildings and damaged buildings. Flood risks can also be reduced at the building level. A 2019 study found that, on average, society saves $5 for every dollar spent on mitigation measures that exceed building code requirements for areas at risk of flooding from rivers, and $7 for areas at risk of hurricane surge flooding./234 Although building codes are adopted and administered at a community level, the federal government can create incentives for communities to adopt and enforce up-to-date building codes and hazard-resistant design standards./235 For example, FEMA's Mitigation Framework Leadership Group suggested that federal programs could be directed to promote the adoption of building codes and other mitigation requirements though incentives such as a higher federal cost share,/236 discounts on insurance premiums, tax credits, or access to additional grants or loans./237 FEMA could also provide funding specifically for retrofitting existing buildings.

39. Increase minimum floodplain management standards for NFIP participation. When communities join the NFIP, they must adopt and enforce FEMA's minimum floodplain management standards, including those that regulate where and how structures may be built within the floodplain. These standards are minimum requirements for NFIP participation; states and communities can elect to adopt higher standards as a means of mitigating flood risk./238

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234 National Institute of Building Sciences, Natural Hazard Mitigation Saves: 2019 Report, Washington, DC, 2019, p. 37, https://www.nibs.org/files/pdfs/NIBS_MMC_MitigationSaves_2019.pdf.

235 For example, FEMA defines a hazard-resistant building code as a "building code with provisions that provide a minimum level of building protection against natural hazards," and considers a community to be hazard resistant if it adopts either of the two most recent editions of building codes without weakening provisions related to flood, hurricane wind, and seismic hazards. FEMA, Building Codes Saves: A Nationwide Study, November 2020, p. xi and p. 3-4, https://www.fema.gov/sites/default/files/2020-11/fema_building-codes-save_study.pdf.

236 See, for example, Section 20606 of the Bipartisan Budget Act of 2018 (P.L. 115-123) as it amends Stafford Act Section 406(b) to authorize an increased federal share for Public Assistance to provide incentives to governments to "invest in measures that increase readiness for, and resilience from, a major disaster," which may include "encouraging the adoption and enforcement of the latest published editions of relevant consensus-based codes, specifications, and standards."

237 Department of Homeland Security, Mitigation Framework Leadership Group, National Mitigation Investment Strategy, Washington, DC, August 2019, p. 16, https://www.fema.gov/sites/default/files/2020-10/fema_nationalmitigation-investment-strategy.pdf.

238 In October 2021, FEMA issued a request for information on the NFIP's floodplain management standards. The public comment period ended on January 27, 2022. See FEMA, "Request for Information on the NFIP's Floodplain Management Standards for Land Management and Use, and an Assessment of the Program's Impact on Threatened and Endangered Species and Their Habitats; Public Meeting; Extension of Comment Period," 86 (222) Federal Register 66329-66330, November 22, 2021.

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For example, FEMA minimum standards require that the elevation of the lowest floor of all new residential buildings in the SFHA to be at or above BFE./239 However, approximately 38% of the U.S. population lives outside of areas with at least one foot of freeboard./240 A community could require the elevation of the lowest floor to be above BFE, or to BFE plus a freeboard/241 of a defined number of feet above BFE. FEMA has found that the average annual losses avoided for freeboard structures was approximately $484 million./242

40. Require stricter controls on development in the floodplain. Communities play a key role in mitigating flood risk through planning requirements, particularly planning controls that restrict or eliminate new development in hazardous locations and discourage rebuilding in high-risk locations. The NFIP could require stricter standards related to floodplain development or provide greater incentives to limit development in the floodplain. For example, local governments could offer incentives to encourage developers to locate projects outside of the SFHA and/or to adopt flood mitigation measures that exceed those required by law. Another option is the use of conditional land use restrictions, which might require a landowner to restrict future use of the land by allowing limited rebuilding, by totally prohibiting rebuilding or by allowing reconstruction with conditions (e.g., that they will remove structures when threatened by erosion or inundation). The NFIP could also require communities to delineate floodplains based on potential future development and apply higher standards for those areas./243

Concluding Comments

FEMA does not currently have the authority to implement an affordability program, nor does the NFIP's current rate structure provide the funding required to support one. If an affordability program were to be funded from existing NFIP funds, it would require either raising flood insurance rates for NFIP policyholders or diverting resources from another existing use. If Congress were to appropriate funding for an affordability program,/244 either Congress or FEMA would face decisions on how to structure this program. Choosing among affordability program options, alone or in combination, requires an evaluation of their effects not only on premiums for households for which NFIP premiums create a cost burden, but also on NFIP net revenues, expenditures from federal general revenues, and take-up rates./245

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239 See 44 C.F.R. Part 60, particularly 44 C.F.R. Sec.60.3.

240 National Institute of Building Sciences, Natural Hazard Mitigation Saves: 2019 Report, Washington, DC, 2019, p. 69, https://www.nibs.org/files/pdfs/NIBS_MMC_MitigationSaves_2019.pdf.

241 FEMA defines freeboard as an additional amount of height above the Base Flood Elevation used as a factor of safety in determining the level at which a structure's lowest floor must be elevated or floodproofed to be in accordance with the state or community floodplain management standards. See https://www.fema.gov/glossary/freeboard.

242 FEMA, Building Codes Saves: A Nationwide Study, November 2020, p. 4-17, https://www.fema.gov/sites/default/files/2020-11/fema_building-codes-save_study.pdf.

243 Natural Resources Defense Council and the Association of State Floodplain Managers, Petition Requesting That the Federal Emergency Management Agency Amend Its Regulations Implementing the National Flood Insurance Program, Washington, DC, January 5, 2021, pp. 46-47, https://www.nrdc.org/sites/default/files/petition-fema-rulemaking-nfip20210105.pdf.

244 For example, the funding which would have been appropriated in the House-passed version of the Build Back Better Act.

245 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. 9, https://riskcenter.wharton.upenn.edu/wp-content/uploads/2019/02/Moving-the-Needle-on-Closing-the-FloodInsurance-Gap.pdf.

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Evaluation of policy options that would make NFIP premiums more affordable would require the ability to estimate the effect of each one on NFIP premium revenues and affordability. Some of the specific options discussed in this report may have conflicting or cascading impacts, so that movement toward one goal may make others harder to accomplish. For example, increased consumer participation could increase the size and scope of the NFIP, but could potentially increase federal fiscal exposure./246 Congress and other stakeholders may want answers to questions with a specific focus on location where premiums would change, such as "What are the effects in a particular congressional district for various groups of property owners?" or "Where are the effects concentrated?"/247

Flooding is already the costliest natural disaster annually in the United States, and more frequent and intense flooding from climate change represents an increasing threat in the future./248 The risk exposure of the NFIP will change over time, particularly due to the likelihood of increasing flood risk and continued development in flood-prone areas, with an increased number of properties likely to be identified as being at risk of flooding./249 A 2013 report on the impact of climate change and population growth on the NFIP concluded that nationally, considering fluvial and coastal floods together, the SFHA is projected to be 40%-45% larger by 2100, with approximately 70% of this increase due to climate change./250

The decision about who pays for affordability assistance entails choices on the part of policymakers. For example, one choice relates to the degree to which costs are borne by federal taxpayers versus the NFIP policyholders who do not receive assistance but pay for assistance to others through a cross-subsidy. Another consideration is the degree to which affordability program costs are borne nationally versus more locally (by states, tribal nations, or communities) or are shared by federal and local governments./251 A number of stakeholders have argued that an effective affordability program should be funded not by premium discounts or surcharges on other NFIP policyholders, but rather by a source external to the NFIP./252 For example, GAO argued that providing premium assistance through appropriations rather than discounted premiums would address the policy goal of making the fiscal exposure more transparent because any affordability discounts on premium rates would be explicitly recognized in the budget each year,/253 and would make NFIP subsidy costs explicit by requiring Congress to appropriate funds for them./254

A central question in any reform of the NFIP is who should bear the costs of floodplain occupancy in the future. The 2015 National Research Council study on flood insurance affordability concluded that the costs of floods can be borne in three possible ways, or in some combination of them.

* Individual policyholders (whether NFIP or private) bear floodplain location cost in the form of insurance premiums paid and damages falling within policy deductible amounts.

* Federal taxpayers bear floodplain location costs if the federal government (1) develops a premium assistance program; (2) makes up for NFIP premium revenue shortfalls; (3) pays for pre-flood mitigation; or (4) makes post-flood disaster assistance payments to individual households.

* Property owners and other floodplain or coastal zone inhabitants bear the costs for losses that are uninsured or otherwise uncompensated./255

Reform of the NFIP would reallocate costs across these groups; Congress would face decisions on how that occurs.

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246 GAO Solvency, p. 33.

247 National Research Council of the National Academies, Affordability of National Flood Insurance Program Premiums: Report 2, 2016, p. 26, http://www.nap.edu/catalog/21848/affordability-of-national-flood-insuranceprogram-premiums-report-2.

248 U.S. Government Accountability Office, FEMA Flood Maps: Better Planning and Analysis Needed to Address Current and Future Flood Hazards, GAO-22-104079, October 25, 2021, p. 41, https://www.gao.gov/assets/gao-22104079.pdf.

249 See, for example, Natural Resources Defense Council and the Association of State Floodplain Managers, Petition Requesting That the Federal Emergency Management Agency Amend Its Regulations Implementing the National Flood Insurance Program, Washington, DC, January 5, 2021, pp. 5-11, https://www.nrdc.org/sites/default/files/petitionfema-rulemaking-nfip-20210105.pdf.

250 AECOM, in association with Michael Baker Jr., Inc., and Deloitte Consulting, LLP, The Impact of Climate Change and Population Growth on the National Flood Insurance Program Through 2100, Prepared for Federal Insurance and Mitigation Administration, FEMA, June 2013, pp. 5-12 and 5-13, https://aecom.com/content/wp-content/uploads/2016/06/Climate_Change_Report_AECOM_2013-06-11.pdf.

251 NRC Affordability Report 1, p. 94.

252 See, for example, GAO Affordability Assistance, p. 22, and GAO Solvency, p. 27.

253 GAO Solvency, p. 27.

254 GAO Affordability Assistance, p. 39.

255 National Research Council of the National Academies, Affordability of National Flood Insurance Program Premiums: Report 2, 2016, p. 12, http://www.nap.edu/catalog/21848/affordability-of-national-flood-insuranceprogram-premiums-report-2.

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Table 1. Legislative Proposals Related to NFIP Affordability

Source: CRS analysis of legislation from https://www.congress.gov.

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

a. S. 3128 and companion bill H.R. 5802

b. S. 2187 and companion bill H.R. 3872

c. S. 1368 and companion bill H.R. 3285

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