King: NFIP Flashcards
Most costly and prevalent natural disaster in US
Flooding
Policy concerns for flooding
Can private market underwrite?
Could flood risk be transferred to private sector
Should NFIP debt to Treasury be forgiven?
Are consequences of flood risk and level of protection effectively communicated to the public?
Why flood insurance considered uninsurable in private market
Adverse selection
Possibility of catastrophic loss
Difficult to accurately price risk
Risk of losses among insureds not independent (high risk load required)
NFIP properties
Administered by FEMA
Develops flood hazard maps
Regulates floodplain development
Informs of potential hazards
Special Flood Hazard areas (SFHAs)
Must adopt and enforce NFIP guidelines in order to keep eligibility
NFIP Challenges
Reduce long term exposure while maintaining program’s solvency and mandate to provide affordable flood insurance to the public
NFIP Issues
Many in floodplain do not purchase flood insurance
Misunderstanding of flood risk (100-year example)
Rates may not adequately reflect flood risk (currently 1/3)
FEMA maps may not adequately identify riskiness
Public cost of post-disaster recovery financing is increasing
Costs distributed among taxpayers but benefit to only those affected
Biggert-Waters Flood Insurance Reform Act
Reauthorized NFIP through 9/30/2017
Changes to strengthen solvency and efficiency:
Increasing premiums
Reducing incentives for rebuilding in flood zones
Four broad causes for economic regulation under NFIP
People insisted social and ethical values need to be reflected in operation of economy
Gov’t viewed as necessary to more efficiently coordinate and use resources
People interested in shifting risk to gov’t
Sole reliance on insurance markets not an option
Repetitive Loss Properties (RLPs)
Severe Repetitive Loss Properties (SRLPs)
Experience several losses
Make up disproportionately large share of flood claims
Reasons for low market penetration of NFIP
Not seen as being worth the $
Misperceptions about low probability risks
Private agents do not market it
Lack of compliance / maintenance
NFIP offering wind coverage – obstacles
Potential adverse selection
Community adoption of wind hazard prevention standards
Difficulties in establishing rates
Enforcement of new building codes
NFIP issues for future consideration
Increasing flood risk vulnerability Affordability of insurance coverage Debt forgiveness Accuracy of flood maps Feasibility of CAT disaster insurance Moral hazards
Long Term Flood Insurance Contracts
Private insurers issue 5, 10, or 20 year flood contracts combined with long term mitigation loans
Assessing NFIP success
How it handles: Extreme weather events Accurate flood maps Financial sustainability Residual flood risk from levees Distributional effects
