MakingtheNFIPWorkforTaxpayersandPolicyHolders:PolicyAffordabilityandProgramStability

October14,2016

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ThispaperwasdevelopedinconjunctionwithC.ScottCanady,ownerandPrincipalatTambalaStrategy,LLC,afinancialservicesandhousingpolicyconsultancy.PriortolaunchingTambalaStrategy,Mr.Canady

servedinaseniorstaffpositionwithintheLouisianacongressionaldelegationandwasappointedDeputyAssistantSecretaryforLegislation,OfficeofCongressionalandIntergovernmentalAffairs,atthe

U.S.DepartmentofHousingandUrbanDevelopment.Mr.CanadyisagraduateofLouisianaStateUniversity.

FundingforthisresearchseriesisprovidedbyGreaterNewOrleans,Inc.

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MakingtheNFIPWorkforTaxpayersandPolicyholders:PolicyAffordabilityandProgramStability

IntroductionTheBiggertWatersFloodInsuranceReformActbecamefederallawonJuly6,2012.1U.S.Rep.JudyBiggert(R-IL),oneofthelaw’seponymousauthors,toldcolleagues,“Today’sfloodreformmeasuredemonstratesatrue,democraticprocess,wherereformsarepublicallyvetted,reflectinputfrominterestedstakeholders,andarerealized.”2AstheBiggertWatersActwasimplemented,angry,frustrated,andconfusedconsumersinundatedCongresswithcomplaintsofexorbitantincreasesinfloodinsurancepremiums.OnMarch4,2014,theU.S.HouseofRepresentativesapprovedtheHomeownerFloodInsuranceAffordabilityAct(HFIAA),byavoteof306–91.OnMarch13,theU.S.SenateoverwhelminglysupportedHFIAAbyavoteof72–22,sendingthemeasuretoPresidentObamawhosignedHFIAAonMarch21,2014.3TheBiggertWatersActacceleratedfloodinsurancepremiumincreasestoquicklyachieveactuarialrateswiththegoalofstabilizingtheNationalFloodInsuranceProgram(NFIP)andbuildingprogramincomeandreserves.4Byrapidlyincreasingpremiums,theActcausedsubstantialdisruptioninhouseholdfinancesandimpairedarecoveringhousingmarket.5LessthantwoyearsafterCongresssetinmotionsubstantialincreasesinfloodinsurancepremiumslegislatorsreassertedthelong-heldviewthatpremiumaffordabilityisafundamentaltenetofnationalfloodinsurance.HFIAAAddressesStructuralProblemswithBiggertWatersActImplementationWhileHFIAAwasadirectreactionbyfederalpolicymakerstoconsumercomplaintsoverpremiumincreases,theActalsoaddressedprogrammaticconcernsexposedthroughtheimplementationoftheBiggertWatersAct.Additionally,manypolicymakerssoughttocombinethesestructuralreformswithpoliciestocreatemarketspaceforprivatecarrierstowritefloodinsurancecoverage.HouseMajorityWhipSteveScalise(R-LA)summeduptheviewsofmanyinCongresswhenhesaidduringdebateonHFIAAintheHouseofRepresentatives—

“Sowhatwearebringingtothefloortodayisanactualsolutiontoaproblem.Thisisnotsomedelay.Itisareal,long-termsolutionthatpaysforitselfwithintheprogramwithrealreformsthatallowpeopletomoveforwardwithafloodinsuranceprogramthatwillbesustainableandultimatelyleadtoaprivatemarketwhereyoudon’tjusthaveFEMAtogoto,youcanactuallyhaveprivateoptionsaswellforfamilies.”6

1 P.L. 112-141, Section 100201, et seq. 2 Congressional Record, June 29, 2012: p. H4622. 3 113th Congress: U.S. House of Representatives roll call vote no. 91; U.S. Senate Record Vote 78; P.L. 113-89. 4 GAO estimated that subsidies would largely be eliminated for most policyholders within a 12 year period under the Biggert Waters Act. See Government Accountability Office, Flood Insurance—Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes, (Washington, D.C., December 2014), p. 11. 5 In congressional testimony on behalf of the National Association of Realtors, Mr. David McKey described the impact of Biggert Waters Act implementation, saying “News reports of surprise “$30,000 flood insurance” notices drove buyers away from properties located in the floodplain and had a chilling effect on real estate markets everywhere.” See Hearing Entitled “No More Hikes: Small Business Survival Amidst Unaffordable Flood Insurance Rate Increases”, U.S. Senate Small Business Committee: June 30, 2016. 6 Congressional Record, March 4, 2014: p. H2137.

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TheActrequiredchangestotheFederalEmergencyManagementAgency’s(FEMA)floodmappingprogramtoimprovemapaccuracy.HFIAAprovidedsignificantnewconsumerprotectionsincludingtheestablishmentoftheFloodInsuranceAdvocate,increasedfundingforconsumerswhosuccessfullyappealfloodmaps,andhaltedtheimpositionoffullriskpremiumsforpoliciesoncertainpropertiesthathadbeenimprovedorsold.Theseandotherlong-termpolicysolutionsbenefitcommunitiesandconsumerswhileprovidingalevelofprogramstabilityforNFIP.TheHFIAAPremiumAdjustmentUndertheBiggert-WatersAct,CongresssoughttoeliminatepremiumsubsidiesfromNFIPbychargingpolicyholderslocatedinhigherfloodriskareaselevation-basedratesreflectiveoftheinsuredstructure’slocationonacurrentFloodInsuranceRateMap(FIRM).Thisprogrammaticchangehadasubstantialnegativeeffectonpolicyaffordabilityforpolicyholderswhere—

» insuredstructureshadbeenconstructedpriortotheissuanceofaFIRM;» insuredstructureswerebuiltincompliancewiththeFIRMeffectiveattimeofconstruction,but

weresubsequentlymappedintoahigherfloodriskarea;» policyholdershadmaintainedcontinuousfloodinsurancecoverage;» aninsuredstructurewassoldaftertheeffectivedateoftheBiggertWatersAct;or,» damagesorimprovementsequaledorexceeded30percentofthestructure’sfairmarketvalue.

InHFIAA,policymakersaddressedpremiumaffordabilityconcernsbyrestoringthepracticeofrate“grandfathering”,reversingtheeliminationofpre-FIRMsubsidized(PFS)policies,eliminatingthepropertysalestrigger,andincreasingdamageandimprovementthresholds.7Accordingtoestimates,approximately20percentofNFIPpoliciesareclassifiedasPFS.Additionally,FEMAestimates10percentofNFIPpolicyholderspayratesbasedonthefloodratemapinforceatthetimeoftheinsuredstructure’sconstructionorinitialratingatthetimecontinuouscoveragewaspurchased.8ToprovideBiggertWatersActratereliefforhomeowners,CongressresetNFIPratestopre-BiggertWatersActlevels,butincludedaminimumannualaverageincreaseof5percentforPFSrateclassifications.ThisHFIAAmandateremainsinplaceuntilratesmeetactuarialstandardsasNFIPpremiumsmaynot,bylaw,exceedthefullchargeableriskrate.9HFIAAalsoresetratesfor

7 NFIP has established two broad property classifications to denote properties constructed prior to an area being mapped for flood risk and those properties constructed or substantially improved in areas that have been mapped for flood risk. Pre-Flood Insurance Rate Map or pre-FIRM properties may be eligible for flood insurance where premiums do not reflect the insured structure’s full flood risk. In this paper such policies are referred to as pre-FIRM subsidized (PFS) policies. Flood insurance policies covering post-FIRM structures are generally to be charged full risk rates. Certain post-FIRM properties may be eligible for “rate grandfathering” if there is satisfactory evidence of compliance with the FIRM in force at time of construction and policyholders have maintained continuous NFIP coverage (includes pre-FIRM properties). Under rate grandfathering, premiums are based on zone and elevation (if known) at time of construction or initial policy purchase notwithstanding an increase in flood risk as determined by a subsequent FIRM. 8 National Academy of Sciences, Affordability of National Flood Insurance Program Premiums, Report 1, Chapter 3 (2015): p. 14 notes that approximately 20 percent of all NFIP policies are classified as pre-FIRM subsidized (approximately 1 million policies). Page 74 of the NAS report indicates that internally, FEMA estimates 10 percent of policies pay grandfathered rates. 9 42 U.S.C § 4015(e)(2) and 42 U.S.C. § 4014(a)(1)

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grandfatheredpolicies,butingeneraldidnotsubjectthesepoliciestominimumannualpremiumincreases.HFIAAratereliefalsoincludedlimitsonannualpremiumincreasesinmostriskcategories.UndertheAct,averagepremiumswithinariskclassificationmaynotincreasebymorethan15percentannuallyandnoindividualpolicypremiummaybeincreasedbymorethan18percentannually.10WhiletheHFIAAaffordabilityprovisionshadanimmediatepositiveimpactforsubsidizedpolicyholdersandpolicyholderseligibleforrategrandfathering,prompteliminationofsubsidiesforotherrateclasseswasretained.Premiumsubsidiesonpoliciescoveringbusinessproperties,investmentproperties,severerepetitivelossproperties,andpropertieswithdamagesorimprovementsequaltoorgreaterthan50percentoftheinsuredstructure’sfairmarketvaluemustbylawincrease25percentperyearuntilactuarialratesareachieved.ThenRep.BillCassidynotedtheeventualityofhigherfloodinsurancepremiumsforallrateclassifications,sayingratereforminHFIAA,“...putstheprogramonaglidepathtoactuarialsoundnessand,inthemeantime,benefitsAmericansacrosstheway.”11The“glidepath”mentionedbyRep.CassidywasakeyaffordabilityreformofHFIAA,inthatthevelocityofrateincreasesforpoliciescoveringprimaryresidenceswasgreatlyreducedandmandatorytimelinestoachieveactuarialratesformostresidentialsubsidizedpolicieswereremoved.ThesechangestotheBiggertWatersActprovidedareprieveforhouseholdsfromwhatRep.Scalisetermed“adeathsentence”tobecarriedoutthroughimmediate,unsustainablepremiumincreases.12Notwithstandingthisreprieve,policyholderswillcontinuetoabsorbyear-over-yearpremiumincreaseswithcertainsubsidizedriskclassificationsexposedtocontinuousincreasesuntilpremiumsreacharateNFIPdeterminestobeactuariallybased.13ThekeyaffordabilityvariableforsuchpolicyholdersistheannualrateincreasedecisiontakenbyNFIP.14IfNFIPsetsratesatthehigherlimitsofHFIAApermissiblelevelsonayear-over-yearbasis,affordabilitywillrapidlybecomeasubstantialconcernformillionsofNFIPpolicyholders.Theaffordabilityriskisnotatheoreticalquestion.PolicyholderswhosepropertiesarenoteligibleforHFIAAraterelief—businessproperties,investmentproperties,andsecondhomes—face25percent

10 42 U.S.C 4015(e)(3); note that annual rate increase limitations do not apply to business properties, severe repetitive loss properties, and second homes, which are subject to alternative pricing requirements. 11 Congressional Record, March 4, 2014: p. H2136. Rep. Bill Cassidy was subsequently elected to the U.S. Senate in November 2014. 12 Congressional Record, March 4, 2014: p. H2137. 13 In 2015, the National Academy of Sciences noted that current NFIP rates are based on average risk of flood loss posed by a group of properties rather than based on an individual property’s risk of flood. All properties within a single risk grouping are charged the same base rate. For a full discussion of actuarial pricing in the NFIP and certain violations of actuarial principles in setting premiums for full-risk rate policies, see National Academy of Sciences, Affordability of National Flood Insurance Program Premiums, Report 1, Chapter 3 (2015). Additionally, in 2009, the Congressional Budget Office concluded it “...cannot determine whether the full-risk premiums currently used in the flood insurance program are actuarially adequate on the whole.” Congressional Budget Office, The National Flood Insurance Program: Factors Affecting Actuarial Soundness (November 2009), p. 13. 14 Excluding rate classifications with a statutory requirement that rates be increased on a specified schedule.

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year-over-yearpremiumincreases.Somehaveforecastthatatthisrateofannualpremiumincreases,suchpropertieswillsoonbepricedoutofNFIPcoverage.15DesignPost-BiggertWatersActNFIPforConsumersInthe2017NFIPreauthorizationpolicymakersmustadoptastrongerpolicyframeworkaddressingpremiumaffordabilitythatrecognizestheeconomic,cultural,defense,andothernationalcontributionsmadebycommunitiesexposedtofloodrisk.Policymakersmustemphasizecollaborationwithlocalandstategovernmentstoidentify,model,andtakeeffectiveactiontomitigatefloodrisk.AcomprehensiveapproachtoreducefloodlossesbeforeadisasteroccursisamoreeffectivemeanstoavoideconomiclossandprotecttaxpayerintereststhanexpellingindividualhouseholdsandbusinessesfromNFIPthroughunsustainableandunaffordablefloodinsurancepremiums.SustainabilityandaffordabilityoffloodinsurancecoverageisagrowingconcernasNFIPisexperiencingayear-over-yeardeclineinseveralkeymetrics.AccordingtoFEMAdata,NFIPpolicies-in-forcepeakedin2009at5,700,235.AsofJune30,2016,thenumberofpolicies-in-forcewas5,083,071,adeclineofalmost11percentfrom2009.16Totalcoverage-in-forceisalsoindeclineafterpeakingatapproximately$1.3trillionin2013andasofJune30,2016,isapproximately$1.25trillion.Foronlythesecondtimesince1978,totalpremiumearnedhasfallenfromthepreviousyear,with$3.54billionofpremiumearnedin2014comparedto$3.44billionin2015.17Thisisnotsufficientevidencetovalidatealong-termforecastofyear-over-yeardeclineforNFIP,butpolicymakersmustbemindfulofdatashowingdeclinesincoreprogramvariablesovertheshort-term.Itmustalsobenotedthatkeycoverage-in-forceandpremiumearneddeclineshavelargelyoccurredpost-BiggertWatersAct.Itisinthenationalinteresttoensureworkforcehousingandservicesinthecommunitiesthatarehubsofdomesticenergyproduction,internationaltrade,nationalandinternationalfinance,agricultureandaquicultureproduction,andothernationally-significanteconomicanddefenseactivities.Affordableandsustainablefloodinsuranceisanintegralcomponentofensuringthesecommunitiescontinuetheirvitalcontributionstothenation.Forpolicymakerstomorefullyachievethecorepurposesofnationalfloodinsurance—floodplainmanagement,limitinggovernmentdisastercosts,andfacilitatingpropertyownerpurchaseofinsurance—theNFIPmustbedesignedwiththeinterestsofendusersaspreeminent.TaxpayerandprogrampartnerinterestsarebetterservedbyincreasingtotalpremiumincomeearnedbyNFIP.Increasesinbothpolicieswrittenandcoverageinforcewillbringgreaterstabilitytocommunitiesandprovidegreaterprotectionforthefederalfisc.Toachievethisend,policymakersmustensurethatflood

15 The authors of this paper are not alone in this concern. In previously referenced testimony (see footnote 5) before the U.S. Small Business Committee, Mr. David McKey, appearing on behalf of the National Association of Realtors, noted “If FEMA takes a typical pre-FIRM property and projects 25 percent increases compounded into the future, it would only take a few years before NFIP rates return to levels that led to the public outcry after BW12.” Testimony available at www.sbc.senate.gov. 16 https://www.fema.gov/policies-force-month (accessed October 4, 2016); author’s calculations 17 https://www.fema.gov/policy-claim-statistics-flood-insurance (accessed October 4, 2016).

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insuranceproductsofferedthroughNFIPareexpresslydesignedtomeettheneedsofconsumers,areaffordable,anddeliveredinwaysthatappealtoconsumers.PolicyProposalsforapost-BiggertWatersActNFIPThe2017NFIPreauthorizationmustbuildonHFIAAasatransitionpointtoasustainablefloodinsuranceprogramthatisrelevanttotheenduser,thecustomer.Toachievethisgoal,Congressshouldadoptpoliciesconcerning—

» ReducingSubsidiesWhileProtectingPolicyAffordability» IncreasingConsumerParticipationinNFIP» WorkingwithPrivateCapitaltoIncreaseFloodInsuranceCoverage» AligningFloodInsuranceRateswithIndividualPropertyRisk» TheConsumerandTaxpayerExperiencewiththeWYOProgram» NFIPAffordabilityandProtectingCommunitiesthroughFloodRiskMitigation

ReducingSubsidiesWhileProtectingPolicyAffordabilityInHFIAACongressrevisedkeypoliciesdrivingsubstantialincreasesinfloodinsurancepremiumsyetretainedtheBiggertWatersActimperativetoreduceoreliminatecertainpremiumsubsidies.Ingeneral,HFIAAlimitsyear-over-yearpremiumincreasesto18percentforindividualinsuredsand15percentfortheaverageofallpremiumincreaseswithinariskclassification.Premiumsformostsubsidizedpoliciesmust,bylaw,increaseatleast5percentonanannualbasis,subjecttotheoveralllimitationthatNFIPnotchargeratesgreaterthanaclassification’sdeterminedrisk.Further,certainpropertyclassificationswillseepremiumincreasesdesignedtorapidlyeliminatesubsidies.HFIAAOnePercentofCoveragePremiumLimitationHFIAAlimitsonannualrateincreasesdonotfullyaddresstheunderlyingissueofpremiumaffordabilityimportanttoconsumers,butdoserveasatemporarycheckonthetrajectoryofpremiumincreases.ItisclearCongressunderstoodtheeventualitythatevenunderHFIAAfloodinsurancepremiumscouldagainrisetounsustainablelevelsforasubstantialpercentageofNFIPpolicyholders.ToaccountfortheinevitableincreaseinpremiumsforbothPFSpoliciesandpolicieswrittenforpost-FIRMinsureds,Congresscreatedanaffordabilitystandardthatfactorsannualfloodinsurancepremiumsasafunctionofapolicy’stotalcoverageamount.Thestatutereads,inpertinentpart—

“Insettingpremiumriskrates,inadditiontostrivingtoachievetheobjectivesofthischaptertheAdministratorshallalsostrivetominimizethenumberofpolicieswithannualpremiumsthatexceedonepercentofthetotalcoverageprovidedbythepolicy.”18

18 42 U.S.C. § 4015(j)

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Toillustrate,underthisaffordabilitymechanismNFIPmustavoidinstanceswhereapolicyholderwhosepolicycoverageequals$100,000paysannualpremiuminexcessof$1,000.Toensurecompliancewiththiscongressionaldirective,FEMAisrequiredtoreporttoCongressonthenumberofpolicieswherethepremiumforfloodinsuranceexceedsonepercentofthepolicy’svalue.FEMAsubmitteditsfirstreporttoCongressconcerningtheonepercentofcoveragetargetpremiumonSeptember20,2016.Inthereport,FEMAidentified428,317policyholders,or8.4percentofallpolicyholders,aspayingpremiumsinexcessoftheonepercentstandard.Additionally,FEMAreportedthatwhennon-premiumpolicyfeesareincluded,701,483policyholders,or13.7percentoftheNFIPcustomerbase,paytotalpolicycostsgreaterthanonepercentofthecoverageamount.19Disturbingly,initsreportFEMAallegesitlacksstatutoryauthoritytoactontheclearcongressionaldirectiveto“strive”tominimizethenumberofpoliciesthatviolatetheonepercentofpremiumstandard.Whilecertainpolicyclasseswereexplicitlyexposedtorapidpremiumincreases,theclearintentofCongresswastoreducefloodinsurancepremiumsforthevastmajorityofpolicyholderswithinNFIP.Injustifyingitsdisregardofcongressionalintent,FEMAstated—

“AlthoughHFIAA-14instructsFEMAtostrivetominimizethenumberofpoliciesinthiscategory,FEMAdoesnothavetheauthoritytoadjustpremiumsbasedonanaffordabilitythresholdsuchaspremiumasapercentofcoverage...FEMAwasgivenauthoritytorateotherproperties,referredtoas“subsidized”properties,lessthanfullrisk,buttheratelevelsareprescribedbylegislation.”20

FEMA’sconclusiontheagencylacksauthoritytoactonaclearandprecisecongressionaldirectivefollowsapatternoftheagencyimplementingpremiumincreaseswhiledisregardingtheaffordabilityneedsofconsumers.Congresspurposefullyincludedtheonepercentdirectivein42U.S.C.§4015,whichgovernsNFIPratesettingauthorityandassuchintendedthedirectiveasaclarificationofratesettingauthority.Suchanovertrejectionofclearcongressionalintent,inlegislationentitledtheHomeownerFloodInsuranceAffordabilityActnoless,isdemonstrativeofanagencyculturethathasstronglyresistedpremiumaffordabilityinitiatives.FEMA’sresistancetoconsiderationsofNFIPaffordabilityformillionsofhomeownerswhorelyonNFIPpoliciesdatesbacktotheagency’srefusalstocompleteacongressionally-mandatedaffordabilitystudyintheBiggertWatersAct.Inthisinstance,agencyofficialsdisregardedtheplainlanguageoftheActrequiringFEMAtocompleteanaffordabilitystudy,allegingthatfundingwasinsufficient.21InHFIAA,

19 Federal Emergency Management Agency, NFIP Policy Premiums Report: Homeowner Flood Insurance Affordability Act of 2014 (Washington, D.C, September 20, 2016), p. 7. 20 Ibid., p. 2. 21 House Financial Services Committee, Report No. 113-52, Implementation of the Biggert-Waters Flood Insurance Act of 2012: Protecting Taxpayers and Homeowners (Washington, D.C., November 19, 2013). In a colloquy between U.S. Rep. Maxine Waters and FEMA Administrator Craig Fugate, Rep. Waters sharply questioned Administrator Fugate on FEMA’s implementation of premium increases while allowing the mandated affordability study to languish. Administrator Fugate stated that “they [NAS] informed us that the amount of funds and the timeframes would be insufficient, and they would only be able to begin part of that study.” Rep. Waters responded by asking “Did you come back to this committee to ask for some help with that...But you didn’t come back here and tells us any of what you are telling us now. Why didn’t you do that?”

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CongresswasmoreexplicitwithitsaffordabilitystudyrequirementandFEMAcomplied,releasingthefirstoftwoaffordabilityreportsinMarch2015.22FEMAmustacknowledgethatfloodinsuranceaffordabilityisakeycomponentofNFIP,household,andcommunitystability—notasecondaryconcerntobeaddressedatsomefuturepoint.FloodinsuranceaffordabilitymustbethebasisofNFIPreform.Thisnecessitatesachangeofculturewithintheagencyatthehighestlevelsofleadership.TheneedforacultureofaffordabilityiseffectivelydemonstratedinFEMA’sreportoncompliancewiththeonepercentaffordabilitystandard.FEMAacknowledgesinitsreportthatasNFIPpremiumsincrease,policyholdersareoptingagainstrenewal.ThisoutcomeachievesanapparentFEMAgoalofde-riskingNFIP’sportfolio,butitdoessobyexcludinghomeownersfromNFIP.ApolicyintendedtopriceconsumersoutofNFIPplacesgreaterobstaclestocommunityrecoveryintheeventoffloodlossesresultingfromapresidentially-declarednaturaldisaster.23FEMAwrote,

“Premiumincreasesapplybothupwardanddownwardpressureonthenumberofpolicyholderspayingpremiumsinexcessof1percent...Lookingforward,aspre-FIRMsubsidiescontinuetobephasedoutmorepolicyholderswillseepremiumsincreasetolevelsabove1percentofcoverage.Butmanyofthesepolicyholdersmaydropfloodinsuranceratherthanpayhigherpremiums.”24

ItwaspreciselyforthisreasonCongressenactedHFIAA,repealingunaffordableBiggertWatersActpremiumincreasesanddirectingNFIPtostrivetoreducethenumberofpolicieswithpremiumsgreaterthanonepercentofcoverage.Thiscongressionally-mandatedapproachtopremiumaffordabilityservestwoimportantpolicypurposes.TheeconomicvalueoffloodinsuranceisretainedforconsumersandmaximumpolicyincreasesarealignedwithcongressionalexpectationswithinthecontextoftheBiggertWatersAct.TheonepercentofcoveragestandardwasintentionalandFEMAhasadutyunderlawtoadheretoit.ProtectingtheEconomicValueofthePolicyfortheConsumerIfaconsumerdoesnotbelievefloodinsurancepremiumsarereasonablyrelatedtofloodriskorthecostofpotentialflooddamage,theconsumerwillnotlikelyseevalueinmaintaininganexistinglevelofcoverage.Thisisparticularlysoforpolicieswithsubsidizedfloodinsurancerates.In2015,theNationalAcademyofSciences(NAS)notedthepriceelasticityofdemandforfloodinsuranceissignificantwhereaconsumerisinahigher-rate,orsubsidized,environment.While

22 P.L. 113-89, Section 16 23 In many cases, federal disaster assistance is contingent on the purchase of flood insurance and may result in the denial of repair assistance through FEMA’s Individuals and Households Assistance program and the denial of low-interest disaster recovery loans through the Small Business Administration. 24 Federal Emergency Management Agency, NFIP Policy Premiums Report: Homeowner Flood Insurance Affordability Act of 2014, p., 8-9. Emphasis added.

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seeminglycounterintuitive,subsidizedpolicyholders,onaverage,payhigherpremiumsthanunsubsidizedpolicyholders.NASwrote—

“Subsidizedpolicy-holdersmaybemuchmoreresponsivetochangesinmarginalpricethanthosewithfullriskpremiums(LandryandJahan-Parvar,2008).”25

TheHFIAAdirectiveontheproportionofannualpremiumpaidtototalpolicycoveragereflectstheLandryandJahan-Parvarresearch.AccordingtoLandryandJahan-Parvartheelasticityofdemandforsubsidizedpolicyholdersinahighrateenvironmentwas-2.09percentforevery1percentincreaseinpremium.LandryandJahan-Parvarconcluded—

“Propertiesthatfacesubsidizedratespurchasesignificantlymorecoverage(onaverage,about$43,000,allelsebeingequal),andaremoresensitivetoprice,εp=-2.09.A1%increaseinpriceleadstoanapproximate2%decreaseincoveragedemandforsubsidizedparcels.”26

TheHFIAAonepercentofpolicycoveragelimitationonpremiumaddressesimportantfactorsinaconsumer’sdecisiontopurchaseandmaintainfloodinsurancecoverageinhigherriskareas.Additionally,thelinktoconsumereconomicdecision-makingispreservedbyencouraginghigherriskpropertiestomaintainhigheramountsofcoverage,whichFEMAacknowledgescanimpacttheratioofpremiumtocoverage.27LandryandJahan-Parvarnotedthatpropertieswithsubsidizedfloodinsuranceratestendtopurchasemorecoveragethannon-subsidizedpolicies.28AlignsMaximumPremiumswithCongressionalIntentBiggertWatersActimplementationseverelydamagedthereputationoftheNFIP.Propertyownersandcommunitieswereexposedtofinancialshocksthatupendedhouseholdeconomicsandcommunitystability.Thereputationaldamagewassoseverethatsomehomeownersprotestedbycollectinghousekeystosendtofederalpolicymakerstoshowtheimminentthreatofforeclosureduetounaffordablefloodinsurancepremiumsandlossofequityinhomes.29BiggertWatersActpremiumincreasessurprisedpolicymakers.DuringdebateonHFIAAintheHouseofRepresentatives,Rep.ShellyMooreCapitosaid—

“Therewasnearunanimousagreementthatsignificantreformswereneededfortheprogram,butwhenthenewfloodinsurancerateswerepublishedlastfall,Ibegantohearfrom,andmetwith,manyWestVirginianswhowereshockedbytheincreasesintheirfloodinsurancebillsthathadfarexceededtheworst-casescenarioinCBO’s

25 National Academy of Sciences, Affordability of National Flood Insurance Program Premiums, Report 1 (2015): p 54. 26 Landry, Craig and Mohammed Jahan-Parvar, Flood Insurance Coverage in the Coastal Zone of North Carolina (2008). 27 Federal Emergency Management Agency, NFIP Policy Premiums Report: Homeowner Flood Insurance Affordability Act of 2014, p. 5. FEMA notes that due to front-loading of rates, the first $60,000 of basic coverage is more expensive than additional coverage over this threshold. 28 Landry, Craig and Mohammed Jahan-Parvar. 29 Linderman, Juliet, “St. Charles town hall meeting on FEMA flood maps draws huge crowds eager to voice concerns,” The Times Picayune, April 13, 2013.

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projection.Insomecases,theironlychoicewastospendtheirlife’ssavingsontheirfloodinsurancebillsorwalkawayfromtheirhouse,ruiningtheircredit.”30

PolicymakershadreliedonprojectionsfromFEMA,subsequentlycitedbyotheragenciessuchastheCongressionalBudgetOffice(CBO),indicatingpolicyholderswithsubsidizedpremiumspaidapproximately40to45percentoftheactuarially-basedpremium.31CongressionaltestimonybytheGovernmentAccountabilityOffice(GAO)in2011isrepresentativeofthecommonexpectationofpolicymakersinthecontextofBiggertWatersActpremiumincreasesforsubsidizedpolicyholders—

“Forexample,theprojectedaverageannualsubsidizedpremiumwas$1,121asofOctober2010,discountedfromthe$2,500to$2,800thatFEMAsaidwouldberequiredtocoverthefullriskofloss.”32

ThisexplainswhysomanyfederalpolicymakerswereshockedthatundertheBiggertWatersActpropertyownerswerequotedfloodinsurancepremiumswellinexcessofprojectionsbasedonFEMAdata.ThedirectiveinHFIAAtolimitthenumberofpolicyholderswithpremiumsexceedingonepercentofpolicyvalueensurespremiumincreasesremainwithintheupperlimitsanticipatedbyCongresswhentheBiggertWatersActwasenacted.Take,forexample—

TotalInsuranceinForceJune2016TotalPoliciesinForceJune2016AverageCoveragePerPolicy

$1,245,739,480,000.005,083,071

$245,076.00

Source:FEMAdataandauthor’scalculations33AccordingtoFEMAdata,thecurrentaveragecoverageinforceforNFIPpoliciesasofJune30,2016,is$245,076.TheHFIAAonepercentofcoveragelimitationwill,onaverage,limitannualfloodinsurancepremiumstoapproximately$2,450.SuchanoutcomeisclearlyalignedwithFEMAactuarialpremiumforecastsof$2,500to$2,800onwhichpolicymakersreliedin2012whenvotingtophaseoutpremiumsubsidiesinNFIP.HadCongressoriginallyrequiredFEMAtoimplementtheBiggertWatersActonthebasisoftheagency’sactuarialpremiumprojections,homeownersandbusinessownerswouldnothavereceivedratequotesandrenewalnoticeswithpremiumsthatdidnot,accordingtotheseconsumers,relatetothevalueof

30 Congressional Record, March 4, 2014: p. H2132. 31 Congressional Budget Office, The National Flood Insurance Program: Factors Affecting Actuarial Soundness, (Washington, D.C.:November 2009): p. 6 FEMA, National Flood Insurance Program: Actuarial Rate Review (Washington, D.C.: October 2011) 32 Government Accountability Office, Flood Insurance—Public Policy Goals Provide a Framework for Reform GAO-11-670T, (Washington, DC: June 23, 2011): p. 5. 33 https://www.fema.gov/flood-insurance-statistics-current-month (accessed October4, 2016); Calculations by author.

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thepropertytobeinsured.InHFIAA,CongresstookthedeliberatedecisiontoprotectpolicyholdersfromsevererateandpremiumescalationbydirectingFEMAtoavoidpremiumsthatexceedtheonepercentofcoveragethreshold.Fundamentally,HFIAA’sonepercentlimitationimplementstheverypolicyMembersofCongressbelievedhadbeenachievedintheBiggertWatersAct.AffordabilityIncentivesforPolicyholdersExceedingOnePercentofCoveragePremiumCapToensureNFIPaccessandaffordabilityinanupwardrateenvironment,policymakersmustretainincentivesforpolicyholderstomaintaincontinuousfloodinsurancecoverage.Incentivesmustbedesignedwiththeconsumerinmindandminimizetheburdenonconsumerstoreceiveaffordabilityassistance.Undercurrentlawandregulation,policyholdersarenotrequiredtotakeanyotheractionthantopurchaseandmaintainfloodinsurancetobenefitfrompremiumsubsidiesaspremiumassistanceisfactoredintotheunderlyingfinancialtransaction.Inthecaseofgrandfatheredpolicies,continuouscoverageisthekeytopolicyaffordabilityforconsumers,includingthosewithPFSpolicies.Thisapproachisnotintendedtodirectsubsidiestopolicyholdersinaspecificincomerange,butrathertoachievethelong-standingpublicpolicyofencouraginghomeownerstopurchaseandmaintaincontinuousfloodinsurancecoverage.Thisapproachshouldbemaintainedandmaximized.Otherthanensuringpoliciesareaffordable,rategrandfatheringincentivizespolicyholderstopurchaseadditionalcoverage.Whilepremiumincomemaynotbefullysufficienttooffsettotalrisk,itisbetterfortaxpayersandcommunitiestopre-fundflooddisastercoststothegreatestextentpossiblethroughthepurchaseoffloodinsurance.Accesstofloodinsuranceclaimspaymentsallowshomeownersandbusinessestobeginrebuildingsooner,signalingtoneighborsandthecommunity-at-largethathomeswillnotbeabandoned,butwillberepairedandrebuilt,oftensubjecttohigherfloodplainstandards.Forcertainhomeownersandbusinesses,floodinsuranceisaprerequisiteforotherformsoffederaldisasterassistancethatmayprovetobethedifferencebetweenrecoveryandbankruptcy.Creatingacomplicatedmeans-testedprogramtoretainthebenefitsofrategrandfatheringandotherprogramratesubsidieswilllikelyreduceNFIPpurchasesastheneedforfloodinsurancecrossesmanydemographics,withhouseholdsofvaryingincomesrelyingongrandfatheredorothersubsidizedpolicies.LandryandJahan-Parvarhavenotedincreasesinpremiumsforsubsidizedpolicieswillresultinthepurchaseofloweramountsofcoverageorfewerpolicies,aconclusionvalidatedbyFEMAreportsanddata.Thisexposestaxpayerstodisastercoststhatmayhaveotherwisebeenoffsetbyfloodinsurancepremiums.TheBiggertWatersActandHFIAAbothreflectthedesireofpolicymakerstodecreasesubsidieswithintheNFIPaswellasthebedrockprinciplethatpremiumaffordabilitydirectlyaffectsconsumerparticipationandconsumerhouseholdstability.Anewandburdensomeprocesstodeliverasubsidythatcurrentlyrequireslittleactionotherthanthepurchaseandmaintenanceoffloodinsurance

13

coveragewillcreateconfusionforconsumers,limitconsumeraccesstoassistance,andlikelyincreasecostsforprogrampartners.Recommendations:1) Congressmustretain—andFEMAmustimplement—themaximumpremiumtargetofonepercentof

policyvaluetoensurebroadaccesstofloodinsurancecoverageforconsumersandtoensureNFIPpremiumsremainwithintargetrangesmeetingcongressionalexpectationsandstatutoryguidance.

2) FEMAmustcontinuetoidentifyanddisclosepoliciesthatexceedtheonepercentofcoverageaffordabilitystandardbydisclosingthelocationandnumbersofsuchpoliciesbyparishorcountyandstate.Toensurecontinuedpurchaseoffloodinsuranceinhigherfloodriskareas,federalpolicymakersmustidentifypolicyholderswithpremiumsinexcessoftheonepercentofcoveragelimitation.Thesepolicyholdersareatgreaterriskofreducingcoverageamounts,droppingcoverageatrenewal,orrefusingtopurchasefloodinsurancewhenexemptedfrommandatorypurchaserequirements.Thereisaclearfederalinterestinretainingprogramparticipationtooffsetfuturefederaldisastercoststhroughpremiumcollection.

3) Forpolicyholderswherepremiumsexceedonepercentofcoverage,limitfuturepremiumincreasestonomorethan[100]percentofpremiumchargedunderthe[2016]ratetablesorthechargeablefullriskrate,whicheverisless.Underthispolicy,aconsumerwithcurrentannualpremiumcostsof$1000.00wouldhaveamaximumpremiumof[$2,000.00]unlesstheactuarialrateisdeterminedtobeless.Alternately,apolicyholderwithacurrentannualpremiumof$2,500.00wouldhaveamaximumpremiumof[$5,000.00]unlesstheactuarialrateisdeterminedtobeless.

4) Providediscountsforpolicyholderssubjecttotheonepercentofcoveragepremiumlimitationtoensurefloodinsurancepolicycostsdonotcausetotalmonthlymortgagerelatedobligationstoexceed[40]percentofmonthlyincomewithgreaterdiscountsprovidedastheratioincreases.34Federalhousingaffordabilitystandardsaretypicallybasedonthepercentageofhousing-relatedcoststoaconsumer’smonthlyincome.ThisisreflectedinmortgageunderwritingstandardsoftheFederalHousingAdministrationandotherhousing-relatedgovernmentsponsoredenterprises.Borrowerswhosemortgage-relatedobligationsexceed28to31percentofmonthlyincomemaystillbedeemedtohavesustainablehousingcostsifotherfactorssuchasshorttermdebt,financialreserves,andcreditscorearetakenintoaccount.Thisprocessisnotuniformlywell-suitedforNFIPpolicyholders,butageneralaffordabilitystandardthatensuresfloodinsurancecostsdonotcauseapolicyholder’shousingcoststoexceed[40]percentofmonthlyincomeprotectsallhouseholdsfromexcessivefloodinsurancepremiums.Householdswithincomebelowcertainpercentagesofareamedianincomewillrequireadditionalassistance.

34 The Federal Housing Administration permits a ratio range of total monthly mortgage obligations to monthly income of 31 percent to 40 percent, dependent on a borrower’s existing debts, credit score, financial reserves, and the likelihood housing related costs will increase. See HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, Part II.A.5.d.vii—Approvable Ratio Requirements (Manual).

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5) Limitpremiumassistancetomandatorypurchasepolicyholdersnotrequiredbyamortgagelendertopurchaseadditionalcoveragethroughprivatecarriers.Suchalimitationfocusespremiumassistancetohouseholdswithmortgagedebtof$250,000.00orless.Policymakersshouldconsiderahigherlimitationforhomeownersinareasdesignatedashavinghighhousingcost.

6) PermitcertainnegativelyelevatedstructurestoqualifyforCRSdiscounts.Forpolicyholdersexceedingthepremiumlimiterofonepercentofinsurance-in-forceandwheretotalmonthlymortgagerelatedobligationsexceed[40]percentofmonthlyincome,permitthepolicytoreceiveCRSdiscountsevenifthestructureisdeterminedtohaveanegativeelevation.

RateCertaintyforPolicyholdersIn2014,GAOmodeledratescenariostonecessarytoachieveactuarialpremiumsforsubsidizedpolicieswhereaninsuredstructurewasatbasefloodelevation(BFE).GAOestimateditwilltakeapproximately25yearstoachieveactuarialratesonasubsidized$50,000policywherethestructureisatBFEifpremiumsareincreased5percentannually.If,underthisscenario,theinsuredstructureisat-2BFE,morethan30yearsof5percentyear-over-yearincreasesarerequiredtoreachanactuarialrate.GAOmodelingalsoshowsthathigheryear-over-yearpremiumincreasessubstantiallyreducetimelinesnecessarytoachieveactuarialrates.AccordingtoGAO,ifsubsidizedratesaresubjectto15percentyear-over-yearincreases,thesubsidyon$50,000ofcoveragewillberemovedinalmost7years.Where$250,000ofcoveragehasbeenpurchasedforastructureat-2BFEandpremiumsareincreased15percentyear-over-year,GAOprojectssubsidieswillhavebeenremovedinapproximately8years.35GAO’sratescenariosexamineincreasesonlyinpolicypremiums.Consumerspayanumberofadditionalchargeswhenpurchasingfloodinsurancethathaveasignificantimpactonaggregatepolicycost.PremiumcomponentsofatypicalNFIPpolicyincludethebasecoveragepremium(structureandcontents),additionalcoveragepremium(structureandcontents),andIncreasedCostofCompliance(ICC)premium.AdditionalpolicyfeesincludetheReserveFundAssessment(RFA),whichiscalculatedat15percentofpremium,theHFIAAsurchargeof$25forprimaryresidencesand$250forotherproperties,andtheFederalPolicyFee(FPF),whichvariesbypolicy.36AccordingtoFEMAratebulletins,chargeableratesacrossthemajorityofriskclassesincreasedinboth2015and2016.Table1shows2015and2016rateandpolicycostincreasesacrossseveralrateclasses.Table1.NFIPPremiumIncreases,2015and2016ZoneDescription 2015(∆ rate) 2015(∆ total) 2016(∆ rate) 2016(∆ total)PFS(AE&VE)PR 14% 15% 5% 5%PFS(AE&VE)NPR 24% 37% 24% 21%

35 Government Accountability Office, Flood Insurance—Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes (Washington D.C., December 2014), Figure 4, p. 12. 36 FEMA’s published fee schedule for 2016 sets the FPF at $25 for preferred risk policies and $50 for standard risk and subsidized policies, with additional charges for condominium projects based on number of units.

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V(Post-FIRM) 9% 13% 10% 9%A-1-A30&AE(PostFIRM) 9% 23% 9% 8%AO,AH,AOB,&AHB 10% 23% 4% 4%AUnnumbered(NoElevation)

12% 21% 13% 12%

A99&AR 12% 19% 4% 4%XStandardRated 11% 20% 3% 3%XPreferredRisk -2% 14% -5% 4%Source:WYOProgramBulletin–W-14053(AttachmentA);WYOProgramBulletin–W-15046(AttachmentA)TherangeofrateincreasesandtotalpolicycostincreasesshowninTable1indicatethedifferentrateincreasepathsofpolicyholdersinthevariousrateclasses.HigherriskcategoriessuchasPFSpolicieshaveseencumulativeincreasesof20percentinpolicycostsfrom2014ratesto2016rates.Thesignificantlylowerrateincreaseforthispolicyclassin2016maybeindicativeofFEMAconcernsthatrateswereincreasingtoorapidly.Additionally,post-FIRMAzonepolicyholdershaveabsorbed18percentcumulativepremiumincreasesfrom2014rates.AccordingtoGAO,policyconcerningthevelocityofrateincreasesiscriticalforconsumersasitaffectsthetimelineofsubsidyremovalandthereforepolicyaffordability.OfparticularimportancetoPFSpolicyholders,FEMAhasnotyetdisclosedtheagency’splantocomplywiththeBiggertWatersActmandateofactuarialratesinthisrateclass.Ofadditionalconcernaretheimpactsofcontinuedincreasesinpost-FIRMAandVzonesthatwillaffectgrandfatheredpropertyownerswherestructureswereconstructedincompliancewithelevationstandardspursuanttoapriorFIRM.Table2andTable3illustratewhythevelocityofrateincreasesareparticularlyimportanttoPFSpolicyholders,whorepresentmorethan1millioninsureds.Table2calculatespolicycostsforaPFSpolicyholderunderratetableseffectiveNovember2015wherethereisnoelevationdataconcerningtheinsuredstructure.AsitisreasonabletoassumemanyPFSinsuredstructureshaveanegativeelevation,Table3estimatesactuarialpolicycostsforthesamecoverageinZoneAwitha-1BFE.

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Table 3—Zone A Construction (Elevation -1 BFE) Basic Limit Premium (60,000 x 4.74) ÷ 100 = 2,844.00 Additional Limit Premium (80,000 x 0.33) ÷ 100 = $264.00 Increased Cost of Compliance

$34.00

CRS Discount ----------- $2000 Deductible Factor

(3,108 x 1.000) – 3,108 = $0.00

Premium Subtotal $3,142.00 Reserve Fund Assessment (3,142 x .15) = $471.00 HFIAA Surcharge

$25.00

Federal Policy Fee $50.00 Total Policy Charge

$3,688.00 UsingthepremiumscalculatedinTable2andTable3,thesamplePFSpolicyholdermustabsorbpremiumincreasesthatwillresultinanestimatedactuarialpremiumof$3,142foratotalpolicycostof$3,688.Thisestimateresultsinadditionalrequiredpremiumof$1,890.Thefollowingchartillustratestheconsumerimpactbasedonrateincreasepathstakentoachievetheestimatedactuarialratefortheconsumerunderfourratescenarios—

ThesescenariosvalidateGAOdatashowingvelocityofNFIPpremiumincreaseshasasignificantimpactonpolicyaffordabilityintheshort-term.IfNFIPoptsfor18percentyear-over-yearrateincreasesforcertainPFSpolicyholders,consumersinthisscenarioreachtheactuarialratebyyear7.37IfNFIPoptsfor15percentyear-over-yearrateincreases,theactuarialratewillbeexceededbyyear8.Annualincreasesof10percentwillachieveactuarialratesinapproximately11years,with5percentincreasesrequiringasmanyas20yearstoreachfullriskrates.

37 While NFIP may increase premiums on a single policy by as much as 18 percent per year (42 U.S.C. 4015(e)(1)), the NFIP is constrained by statute which dictates that no single premium class may receive a greater than 15 percent premium increase on average (42 U.S.C. 4015(e)(3)).

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years

PFS to Actuarial Rate Scenarios

18 Percent

15 Percent

10 Percent

5 Percent

Actuarial Rate

Table 2—Pre-FIRM Subsidized, Zone A (no elevation data)

Basic Limit Premium (60,000 x 0.89) ÷ 100 = $534.00 Additional Limit Premium

(80,000 x 0.81) ÷ 100 = $648.00

Increased Cost of Compliance

$70.00

CRS Discount ----------- $2,000 Deductible Factor

(1,182 x 1.000) – 1,182 = $0.00

Premium Subtotal $1,252 Reserve Fund Assessment

(1,252 x .15) = $188.00

HFIAA Surcharge

$25.00

Federal Policy Fee $50.00 Total Policy Charge

$1,470.00

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IfFEMAoptsforanaverageyear-over-yearpremiumincreaseof10percent,asisthecasefortheaverageof2015to2016forPFSpolicies,itisreasonabletoassumePFSpolicyholderswillreachprojectedactuarialrateswithin11years.TheplannedtrajectoryoffloodinsurancepremiumsisinformationmaterialtothefinancialstabilityofPFShouseholdsandshouldbedisclosed.PFSpolicyholdersadditionallydeservetobeinformedofNFIP’spricetargetnecessarytoreachfullrisk-basedpolicycosts—thepointatwhichautomaticrateincreaseswillcease.Thisismorethanforthepurposesofapprisingconsumersofpremiumraterisk,itisalsonecessaryforNFIPtoensurepolicyholdersarenotchargedrisk-basedratesthatexceedtheactuarialrate.CongresshastaskedNFIPwithmanagingseveralvariablesinthepremiumcalculation.Thesevariablesincludeestablishingamaximum(actuarial)rate,limitationsonannualpremiumincreases,andadirectivetostrivetominimizethenumberofpolicieswithapremiumtocoverageratioofgreaterthanonepercent.38ThisrequiresthatNFIPvalidateeventualpremiumtargetsandratepathstothatwillbetakentoachievethesepremiumoutcomes.DisclosureofbothpremiumrateriskandestimatedactuarialrateswillallowPFSpolicyholdersandcommunitiestoplanforimplementationofactuarialpricing.DisclosurewillalsoprovidepolicymakersbenchmarksforNFIPtoachieveactuarialsoundnesswithinthelimitationsoftheprogram’sauthorizingstatute.Recommendations:

1) NFIPshoulddisclosetopolicyholderstotalpremiumandpolicycoststhatreflectafullriskpolicyfortheinsuredstructurebasedoncurrentorbestavailableinformation.

2) NFIPshoulddisclosetoPFSpolicyholdersthecurrentprojectedyear-over-yearpremiumincreasesnecessarytomeetNFIP’stargettimelinetoachievetheprojectedfullriskratepolicyrate.

IncentivestoCollectElevationDataThekeymetricsfordeterminingtotalNFIPpolicycostsandthereforeaffordabilityarepropertyelevationandNFIPrateincreasevelocity.AshasbeendocumentedbyNAS,elevationdataonasubstantialmajorityofNFIPpolicies,includingPFSpoliciesandgrandfatheredpolicies,arelargelyunavailable.39Thelackofelevationdatasignificantlylimitsaffordabilityforecastsastherateimpactofaninsuredstructure’selevationrelativetoBFEissubstantialinhigherfloodriskzones.Policyholderswithoutelevationcertificatesmaypayhigherpremiumsthanarenecessaryiftheinsuredstructure’selevationisatoraboveBFE.Alternatively,elevationdatamayputotherpolicyholdersat

38 42 U.S.C. § 4015(e)(2), (3), and (4). 39 National Academy of Sciences, Affordability of National Flood Insurance Premiums, Report 2 (Washington, D.C., 2016): p. 70. NAS reports that approximately 70 percent of NFIP policy records contain no elevation data. This is largely a result of NFIP not requiring elevation data for PFS policies or policies not located in an area having a high risk of flood.

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greatriskofunaffordablepremiumincreasesifanelevationcertificateshowsanegativeelevationrelativetoBFE.TocollectreliabledataonfloodriskandtoaccuratelycalculatethevalueofthesubsidyforPFSpoliciesFEMAmustincentivizepolicyholderstoobtainanddiscloseelevationdata.ResistancetodeterminingelevationifthedataleadtohigherfloodinsurancepremiumsiseconomicallyrationalforconsumersastheimpactofNFIPrateincreasesonhomeownersisprofound.AccordingtotheRANDCorporation,a$500increaseinfloodinsurancepremiumsmayresultinacorrespondinglossofasmuchas$10,000inpropertyvalue.40ApplyingthisstandardtotheconsumerinTable3,theconsumerwillloseasmuchas$30,000inhomeequityandfacetheprospectofthehome’svaluebeinglessthantheunpaidprinciplebalanceonthemortgage.

Inadditiontothenegativeimpactonhouseholdfinances,increasesinfloodinsurancepremiumsmayhavesignificantimpactsonlocalgovernmentsasreducedpropertyvaluesdrivedowntaxassessments.Therecenteconomicrecessionwheremillionsofhomeshadmarketvalueswellbelowtheunpaidbalanceofmortgagesstifledlocaleconomiesandstalledrealestatemarkets.Toavoidthisoutcomeandtoincentivizecollectionandreportingofelevationdata,NFIPpremiumrateincreasesshouldbeconstraineduntilelevationdataisobtainedandinsuredswhoobtainelevationdatashouldhaverateriskreduced.

ItisinthebestinterestsofbothNFIPandconsumerstohavevalidatedelevationdata.Absentelevationdata,FEMAmustestimatetargetactuarialratesandconsumersmaybechargedhigherratesasaresult.Withoutelevationdata,consumerslackkeyinformationnecessarytomakeeconomicallyrationalchoicesconcerningmitigationopportunities.Further,NFIPparticipatingcommunitieslackbasicinformationtoguidefloodplainmanagementactivities.Toovercomebarrierstoobtainingelevationdataandtorealizethefullbenefitsofhavingsuchdata,FEMAmustincentivizethecollectionandreportingofelevationdata.

Recommendations:1) Incentivizepolicyholderstoobtainandmakeavailableelevationdatainexchangeforaguaranteed

year-over-yearrateincreaseschedule.Certaintyofhousingcostsisanimportantaspectofhouseholdfinancialstability.Long-rangecertaintyofhouseholdexpensesmaybesufficienttoovercomeinsuredfearsofincurringhigherfloodinsurancepremiumsinthenear-term.

2) OfferexistingPFSandpost-FIRMpolicyholderswithoutanelevationcertificateaone-timeratecreditforthecostofobtainingelevationdata.AccordingtoFEMAthecoststoobtainanelevationcertificatevaryfrom$500toasmuchas$2,000andinsomecasesmaybetoogreatforcertainhouseholdstobear.41Offeringapremiumcreditforthecostofobtaininganelevationcertificatewillallowinsuredstorecoupcoststhatmaybeabarriertoobtainingdata.Additionally,suchacreditmayoffermarketincentivesforengineeringfirmsandsurveyorstomoreaggressivelymarketelevationcertificateservicestopolicyholderswithmarketcompetitionreducingconsumercosts.

40 RAND Corporation, Flood Insurance in New York City Following Hurricane Sandy (2013): p. xvii. 41 FEMA, Homeowner’s Guide to Elevation Certificates (Washington D.C., 2013).

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3) Partneringwithparticipatingcommunitiesandstategovernmentstoobtainelevationdata.NFIPshouldofferCommunityRatingSystem(CRS)creditforparticipatingjurisdictionsthatrequireanelevationcertificatetobepreparedatasubsequenttransferoftitleforstructuresinafloodzonewhereelevationdataarenotavailable.UnderthecurrentCRSCoordinator’sManual,participatingcommunitiesareactivelydiscouragedfromcollectingelevationdataonpre-FIRMstructuresinareasdesignatedasSpecialFloodHazardAreas(SFHAs).Themanualstates—

“TheCRSpreferstoseenobuildingsinthefloodplainratherthanprovidecreditforrecordsonthosethathavebeenbuilt.”42

Thispolicyisshort-sightedgiventhelackofelevationdataonpre-FIRMstructuresandNFIP’sstatutorydirectivetochargenomorethanthefullriskrateforfloodinsurance.TheCRSmanualnoteslackofelevationdatais“oneofthegreatestimpedimentstosellingfloodinsurance.”43LackofelevationdataisalsooneofthegreatestimpedimentstoNFIPcomplyingwithitsmandatetochargenomorethanactuarialrates.Theabilitytoreduceratesforcommunitiescommittedtoobtainingelevationdatamayoffergreaterassurancesandratecertaintytopolicyholders.

4) Continuedpartnershipswithstatesgovernmentstoimprovequalityandfrequencyofelevationdata

collectedthroughalternatemeans.TheuseofLightDetectionandRanging(LiDAR)remotesensingtechnologyreducesthecostofcollectingelevationdataandimprovementstotechnologymayallowFEMAandstategovernmentstodevelopstructurespecificelevationdatasets.CongressshouldcontinuetosupportFEMA,otherfederalagencies,andstategovernmentsinthedevelopmentofLiDARdatasets.CongressshouldconstrainFEMAratesettingauthoritybasedonLiDARdatauntilNFIPcandemonstratethatdataarebeingusedonacomprehensivebasistopreemptivelyreducefloodriskandthatNFIPremainsaccessibletoconsumersonthebasisofaffordability.

42 National Flood Insurance Program Community Rating System Coordinator’s Manual, FIA-15/2013 (OMB No. 1660-0022): p. 310-12. 43 Ibid., p. 310-2.