H6. King

Question 1

4 reasons that Flood insurance is considered to be uninsurable in the private market:

Answer 1

1. Only the people with the highest risk levels tend to purchase coverage
2. Possibility of catastrophic losses
3. Difficult to accurately price the risk due to limitations in hazard assessment
4. Because the risk of losses among the insureds are not independent, a very high risk load is required

Question 2

Policy questions/ concerns raised by the fact that storms of Sandy’s strengths are expected to occur more frequently:

Answer 2

• Is federal flood insurance that complements land use management still an appropriate method to manage flood risk? Does it distribute the burden effectively between the insured and the general public
• Is flood risk possible for the private market to underwrite?
• Could flood risk be effectively transferred to the private sector (via reinsurance) or the capital markets (via catastrophe bonds)
• Should the NFIP debt to the Treasury be forgiven
• Are the consequences of flood risk and the level of protection offered by hurricane protection systems effectively communicated to the public?

Question 3

What are two conflicting objectives of policymakers:

Answer 3

1. Reduce the long term exposure to flood losses, while

2. Maintaining the program’s solvency and mandate to provide affordable flood insurance to the public

Question 4

3 uses of the flood hazard maps developed by FEMA for NFIP:

Answer 4

• Set insurance rates
• Regulate floodplain development
• Inform those who live in the 100-year floodplain of the potential flood hazards

Question 5

Issues with the current NFIP:

Answer 5

• Even though residents who have a federally backed mortgage and live in a floodplain need to have flood insurance, many do not purchase
• Many individuals misunderstand flood risk, thinking that if a 100 year flood occurs, there will be no more floods of the same magnitude for 100 years.
• Many individuals misunderstand the risk spreading function of insurance, and are too optimistic about the chance of damage to their property
• NFIP rates may not adequately reflect the flood risk, because Congress requires that the coverage is widely available and affordable
• FEMA’s new digital maps may not meet appropriate flood hazard data quality standards.
• The public cost of post disaster recovery financing is increasing

Question 6

List some questions raised by the conflicting policymaker objectives

Answer 6

• How can FEMA balance actuarial rates and affordability?
• How to reduce the escalating cost of flooding?
• How to motivate property owners to purchase insurance protection, and encourage the local governments to make land use adjustments to restrict development in high risk flood zones?
• How can the private sector’s role be expanded in assuming NFIP flood risk?

Question 7

3 responsibilities of FEMA regarding hazard maps:

Answer 7

1. Identifying areas of special flood, mudslide or flood related erosion hazards
2. Completing a Flood Insurance Study (FIS)
3. Issuing a Flood Insurance Risk Map (FIRM) that indicates risk premium rate zones

Question 8

2 reasons that hazard mitigation is not always incorporated into the risk management decision making of the government and private sector:

Answer 8

1. the restrictive land-use zoning regulations and building requirements may conflict with plans for economic development
2. the cost-sharing mitigation funding requirements on property buyouts and relocation of at risk properties is a financial burden for the communities

Question 9

List some issues of contention that still exist after the Biggert-Waters Act:

Answer 9

• It is difficult for FEMA to assess the levee-specific risk and corresponding risk premium
• The premium adjustments necessary to strengthen the financial solvency of the NFIP could result in property owners dropping their policies
• Experts believe that even if FEMA increases the rates up to the maximum amount allowed (20% per year), they would still have insufficient funds to cover the obligations.
• FEMA owes $17.5B to the Treasury for losses due to Katrina.
• Many experts do not believe that FEMA will be able to repay this within 10 years.

Question 10

2 changes made to the NFIP by the Biggert-Waters Flood Insurance Reform Act of 2012:

Answer 10

1. Increasing the premiums

2. Reducing incentives for rebuilding in flood risk zones

Question 11

2 ways that the government became a de facto regulator of economic activity in flood prone areas under NFIP:

Answer 11

1. Flood insurance may be required as a condition of obtaining a federally secured mortgage loan, for buildings located in SFHAs
2. Managerial regulation, where the government provided
   subsidized flood insurance in communities that took steps to regulate the flood plain through land-use zoning ordinances and building standards

Question 12

List some examples of questions that policymakers ask when deciding whether to intervene in private insurance markets:

Answer 12

• Do economic markets provide a sufficient amount of insurance against flood hazards?
• Are the insuring firms (that cover flood) sufficiently capitalized so that widespread insolvency would not occur?
• Would federal disaster insurance crowd out the private market and create unintended liabilities for taxpayers?
• Would insurers cherry pick the most appealing risks, leaving the unprofitable business for the government?

Question 13

3 reasons that premium subsidies are often thought to be appropriate for flood risk:

Answer 13

1. residents of flood-prone areas did not understand the flood risk when they built there
2. there were no public safeguards restricting construction in the floodplain
3. premium subsidies on pre-FIRM structures could motivate communities to participate in the program

Question 14

List the 4 causes for economic regulation:

Answer 14

1. People insisted that social and ethical values need to be reflected in the operation of the economy, in addition to economic values.
2. The government was viewed as necessary to more efficiently coordinate and use the resources, as it is able to prescribe land use zoning ordinances and building code standards
3. Due to the widespread flooding in the 60s, people became interested in shifting risk from themselves to the government. Premium subsidies were thought to be appropriate
4. Sole reliance on insurance markets was not an option. Historically, the insurers and individuals have not had sufficient information for the market to operate effectively

Question 15

2 ways that the premium subsidies to RLPS have been phased out

Answer 15

1. voluntary buyouts

2. charging full actuarial rates to owners who do not accept FEMA’s offer to mitigate the impact of flood damage

Question 16

List some actions that FEMA has taken to address the problem of
Repetitive Loss Programs:

Answer 16

• Reconstruct/ elevate or flood-proof substantially damaged structures to prevent future damage.
• Phasing out premium subsidies to RLPs
• Provide data to communities to help them address RLPs

Question 17

List some explanations for the low market penetration of NFIP:

Answer 17

• The insurance is seen as not being worth the cost
• People have misperceptions about low probability risks and lack information about the NFIP
• Private insurance agents do not market the NFIP
• There is a lack of compliance with the mandatory purchase requirement; or the owners do not maintain the coverage for the life of the loan
• Homeowners in the risky areas may not have a mortgage, or have a mortgage from a lender that does not enforce the requirement

Question 18

List an argument for expanding the NFIP to offer optional wind coverage.

Answer 18

This is necessary because of difficulties of property owners obtaining affordable private wind coverage along the Gulf and Atlantic coasts

Question 19

List an argument against expanding the NFIP to offer optional wind coverage.

Answer 19

• there is already adequate coverage capacity via the private market or state residual market.
• Adding coverage to the NFIP will increase the financial exposure to taxpayers.
• NFIP may not necessarily be able to determine actuarially sound rates
• even actuarial rates will not be sufficient to cover administration costs and losses in the event of a catastrophic event.

Question 20

3 questions regarding the increasing flood risk vulnerability due to frequent extreme weather events and population growth in flood prone areas

Answer 20

1. what additional steps should the government take to manage and mitigate the flood disasters and discourage overdevelopment in the flood vulnerable areas?
2. how to best improve the coordination between the water resources and floodplain management agencies at the federal, state and local levels
3. is there a need to plan for the sustainability of the NFIP in an environment of increasingly frequent catastrophic flooding

Question 21

List some issues that still remain for future congressional consideration, following the Flood Insurance Reform Act of 2012:

Answer 21

• The increasing flood risk vulnerability due to frequent extreme weather events and population growth in flood prone areas
• Affordability of insurance coverage in era of actuarial premium pricing
• Debt forgiveness
• Accuracy of flood hazard maps and risk assessment methods
• Movement toward a comprehensive integrated watershed management framework of risk perception, risk management, and disaster response strategy
• Feasibility of catastrophe disaster insurance
• Federal disaster assistance and moral hazard

Question 22

3 questions regarding Debt forgiveness:

Answer 22

1. should Congress eliminate NFIP’s debt?
2. if so, what would be the consequences across the various stakeholders of debt forgiveness?
3. will the NFIP reserve be sufficient to offset the future catastrophic loss years?

Question 23

4 questions regarding the affordability of insurance coverage in era of
actuarial premium pricing

Answer 23

1. will the changes in the premium structure from the 2012 Act be sufficient to address the solvency concern?
2. what is the feasibility of vouchers for low income policyholders?
3. what is the best approach to balance the trade off between increasing the NFIP’s future income versus making coverage available and affordable?
4. would privatization of flood risk make insurance more or less affordable?

Question 24

List some potential obstacles to offering wind coverage, as stated by GAO:

Answer 24

• Potential adverse selection
• Communities would have to adopt wind hazard prevention standards
• There is uncertainty about the adoption of programs to accommodate wind coverage
• Difficulties in establishing a new rate setting process
• Enforcement of new building codes
• Administration and oversight of the program

Question 25

2 questions regarding the Movement toward a comprehensive integrated watershed management framework of risk perception, risk management, and disaster response strategy:

Answer 25

1. should there be a more encompassing water resources and mitigation planning process that encourages flood and water resources planning and flood mitigation on a watershed basis?
2. what is the best approach to strengthening local floodplain management and planning, and to guide development in regulated floodplains to save lives and reduce property damage?

Question 26

2 questions regarding the Accuracy of flood hazard maps and risk assessment methods:

Answer 26

1. is there need for a common definition of flood protection between the US Army Corps of Engineers and FEMA levee certification?
2. what resources will be necessary to produce both flood risk and coastal hazard vulnerability maps?

Question 27

1 question regarding Federal disaster assistance and moral hazard:

Answer 27

does the presence of federal disaster assistance introduce moral hazard in flood management in a way that inappropriately shifts risks to taxpayers

Question 28

2 questions regarding the feasibility of catastrophe disaster insurance:

Answer 28

1. what is the best approach to address misperceptions about the nature of the NFIP, and barriers to public understanding about flooding?
2. should the NFIP cover all claims associated with catastrophic losses, or just the claims in an average annual loss year?

Question 29

Advantage of the Multiple Peril HO Policy that covers Flood approach:

Answer 29

Greater pooling and diversification of flood risk.

Question 30

6 policy options to address the projected increase in flood losses, due to population growth and migration, changes in climate and degradation of water-based resources:

Answer 30

1. Long Term Flood Insurance Contracts (LTFIC): 5, 10 or 20 year flood insurance contracts combined with long term mitigation loans.
2. Privatization of Flood Risk: Options include a multi-peril insurance approach, and a reinsurance pool approach.
3. Multi-Peril Homeowners Policies covering Flood Peril: multiple-peril policies that cover flood, and transferring all of the flood risk to the federal government via reinsurance transaction.
4. Community-Based Flood Insurance Policy Contracts: Group flood insurance for the entire community/ identified floodplain area/ residual risk areas behind the levees.
5. Integrated Watershed-Based Risk Management Strategy: Combines floodplain management with natural resources (water resources and waste water) management
6. Technological Innovation in Financing Large-Scale Natural Disasters

Question 31

Disadvantage of Technological Innovation in Financing Large-Scale Natural Disasters:

Answer 31

Legislation would encourage coastal development in environmentally sensitive areas by lowering costs.

Question 32

Disadvantages of the Multiple Peril HO Policy that covers Flood approach:

Answer 32

• not necessarily fair
• potential new liabilities for tax payers
• institutional and practical issues surrounding the way that private and social risks are managed and financed (eg rate setting processes, data quality, coverage for catastrophic losses, oversight, etc)

Question 33

The success of the NFIP will be judged based on how it handles what challenges:

Answer 33

• Extreme weather events and coastal flooding: experts believe that storm impacts will intensify as sea levels rise
• Accurate Flood Risk Maps
• Financial Sustainability of the NFIP: charging full actuarial rates will make the policies less affordable
• Residual Flood Risk from Levees: the existing regulatory framework for residual risk behind a certified 100 year levee has created a perceived safety zone that encourages development behind the levee system, although risk still exists
• Distributional Effects of the NFIP: there is a perception of inequitable distribution of NFIP’s costs and benefits across income groups and geographic regions