Flood Insurance

Question 1

NFIP policy goals (2)

Answer 1

• provide access to primary flood insurance, transferring some risk from property owners to the federal government
• mitigate and reduce the nation’s comprehensive flood risk through floodplain management standards

Question 2

NFIP social goals (2)

Answer 2

• provide flood insurance in flood-prone areas to property owners who otherwise would not be able to obtain it
• reduce government’s cost after floods

Question 3

NFIP non-insurance activities (5)

Answer 3

• disseminate flood risk information through flood maps
• require communities to adopt land use and building code standards in order to participate in the program
• reduce the need for other post-flood disaster aid
• contribute to community resilience by providing a mechanism to fund rebuilding after a flood
• protect lending institutions against mortgage defaults due to uninsured losses

Question 4

when flood insurance is mandatory

Answer 4

properties in a Special Flood Hazard Area (SFHA) with a federal mortgage; enforced by the lender

Question 5

three categories of NFIP subsidies

Answer 5

• pre-FIRM – properties built/improved before 1975, or before FEMA published the first Flood Insurance Rate Map (FIRM)
• newly mapped – properties newly mapped into a SFHA
• grandfathered – properties that have policies in effect when remapped into a new flood rate class and maintain continuous coverage

Question 6

NFIP arrangements with private insurers (2)

Answer 6

• Direct Servicing Agent - insurers act as private contractors on behalf of FEMA
• Write-Your-Own (WYO) Program - private insurers are paid to write and service policies

Question 7

why flood insurance has historically been considered uninsurable by the private market (4)

Answer 7

• catastrophic nature of flooding
• difficulty of determining accurate rates
• risk of adverse selection
• unable to provide adequate rates that consumers find affordable

Question 8

barriers of entry for private market to compete with NFIP (7)

Answer 8

[CARS CAN = continuous coverage / at least a broad /
regulatory uncertainty / subsidized rates / cannot assess risk / adequate consumer participation / non-compete clause]

• continuous coverage is required for property owners to retain subsidies in NFIP
• coverage must be “at least as broad” as coverage by NFIP in order to fulfill mortgage requirements
• would require increased state regulatory oversight
• may not be able to compete with FEMA-subsidized rates
• private insurers cannot assess risk accurately
• adequate consumer participation is necessary to maintain a sufficiently large risk pool
• until 2019 “non-compete” clause restricted WYO carriers in selling their own flood policies

Question 9

benefits of increased private sector participation in flood insurance (2)

Answer 9

• increased consumer choice

* cheaper flood insurance for some risks

Question 10

concerns with increased private sector participation in flood insurance (3)

Answer 10

• variable consumer protections
• adverse selection for NFIP
• less NFIP revenue will be generated for flood mapping and floodplain management, and enforcement will be more difficult

Question 11

potential expansions of mandatory coverage requirement for flood insurance (3)

Answer 11

• expand to more types of mortgage loans
• require all properties in SFHA to carry flood insurance
• include flood coverage on homeowner insurance policies