NFIP Flashcards
most costly and prevalent natural disaster in the US
Flooding
NFIP created to
to fulfill a social need of providing affordable flood coverage to the public, federal government wanted to reduce the tax burden in the event of a catastrophe by reducing the amount of disaster relief funds needed
statutory mandate of NFIP
To provide available and affordable flood insurance coverage to the public
Since Hurricane Sandy, there has been increasing policymaker attention on:
Effectiveness of the existing national program for floodplain management in reducing losses from weather related coastal hazards, aging coastal protection infrastructure & increasing vulnerability to storm impacts, Low participation in the National Flood Insurance Program (NFIP), Increasing cost of flooding to the taxpayers
Flood insurance is considered to be - in the private market
uninsurable
Only the people with the highest risk levels tend to purchase coverage, Possibility of catastrophic losses, Difficult to accurately price the risk due to limitations in hazard assessment, Because the risk of losses among the insureds are not independent, a very high risk load is required. This would drive up the premiums to such high levels that few will be willing to purchase coverage
Federal Emergency Management Agency (FEMA) administers the program by
developing flood hazard maps that are used to: Set insurance rates, Regulate floodplain development, Inform those who live in the 100-year floodplain of the potential flood hazards
creation of the NFIP marked a shift in US flood control policy, from
from a “levee only” approach, to a risk identification/ risk financing and floodplain management approach that incorporates individual responsibility.
since the creation of the NFIP, been new social and economic challenges
(growth in population and property values in coastal areas) that have complicated the challenges facing US flood management policy
Issues of Contention for NFIP
- even though residents who have a federally backed mortgage and live in a floodplain are required to have flood insurance, many do not purchase it
- moral hazard: People will not buy coverage because they know that the government will bail them out through disaster recovery funds. This has caused the NFIP be hard to financially sustain over the years
- 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 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. However, if owners had to pay more of the cost, they would make better decisions
- FEMA’s new digital maps may not meet appropriate flood hazard data quality standards
- public cost of post disaster recovery financing is increasing. It may be prudent to: identify areas where it no longer makes sense to rebuild and develop a culture of building construction that reduces the flood vulnerability
- One criticism of the current program is that the costs are widely distributed among the taxpayers, whereas the benefits are provided mainly to the wealthy counties & owners of vacation homes. However, this is not entirely true
Even though it is widely acknowledged that hazard mitigation is an important factor in reducing flood losses,
it is not always incorporated into the risk management decision making of the government and private sector (restrictive land-use zoning regulations and building requirements may conflict with plans for economic development, cost-sharing mitigation funding requirements on property buyouts and relocation of at risk properties is a financial burden for the communities)
FEMA’s responsibilities include
: Identifying areas of special flood, mudslide or flood related erosion hazards, completing a Flood Insurance Study (FIS), issuing a Flood Insurance Risk Map (FIRM) that indicates risk premium rate zones
Biggert-Waters Flood Insurance Reform Act of 2012
- reauthorized the NFIP through September 30, 2017
- made a number of changes to strengthen the financial solvency and efficiency of the program, including: Increasing the premiums, reducing incentives for rebuilding in flood risk zones
- 2012 Act allowed the rates to reflect catastrophic loss years, and established a catastrophe fund (prior NFIP did not have a financing mechanism to handle catastrophic losses)
- Experts argue that NFIP will not be financially sound until actuarial risk based rates are charged. This will also discourage development in the most risky areas.
- 2012 Act eliminates the subsidized premium
he 2012 Reform Act addressed the problem of low participation by increasing the penalty on lending institutions that fail to require flood insurance from $350 to $2,000 per violation
There are still several post-reform issues of contention
- Revised analysis & mapping of Non-Accredited Levees: FEMA agreed to map residual risk (levee protection) below the 100-year standard and give credit for this protection. It is however difficult to assess the levee-specific risk and corresponding risk premium
- Actuarial Soundness, Program Solvency & Affordability: The premium adjustments necessary to strengthen the financial solvency of the NFIP could result in property owners dropping their policies. In addition, 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.
- Debt Forgiveness: 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
- Private Sector Role in Financing Flood Risk: Is it feasible to expand the role of the private sector to assume a portion of the flood risk? Will reinsurers be willing to assume the risk and transfer it to the capital markets?
Under NFIP, the government became a de facto regulator
of economic activity in flood prone areas.
- economic regulation is accomplished in two ways
- Flood insurance may be required as a condition of obtaining a federally secured mortgage loan for buildings located in SFHAs
- 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
There are some things to keep in mind about NFIP financial solvency
NFIP was not capitalized at inception, NFIP does not operate under the traditional definition of solvency that requires it to have statutory reserves in order to sell insurance
