Date: July 24, 2015
Community-Based Flood Insurance Offers Potential Benefits, Faces Many Challenges
WASHINGTON -- Community-based flood insurance -- a single insurance policy that in theory would cover an entire community -- may create new opportunities to reduce flood losses and enhance the likelihood of communities paying more attention to flood risk mitigation, says a new report from the National Academies of Sciences, Engineering, and Medicine. This option for providing flood insurance, however, would not provide the sole solution for all of the nation’s flood insurance challenges.
Communities already play substantial roles in flood risk management, for example through implementing land-use decisions, building codes, and evacuation plans. Many communities also participate in the Community Rating System, a voluntary program within the National Flood Insurance Program (NFIP), which offers discounts on premiums to policyholders in communities that undertake actions such as public information and outreach, mapping and regulations, flood damage reduction, and warning and response.
Although it has yet to be implemented, the policy option of community-based flood insurance could increase coverage purchase rates, promote mitigation and floodplain management strategies that reduce risk to individual properties, reduce premiums, and cut down on NFIP administrative costs by issuing collective policies rather than individual ones.
However, the prospects for community-based flood insurance may be compromised if communities are unwilling to participate, have limited administrative capabilities to implement a program, or lack authority to regulate land use and collect revenue, the report notes. Variations in the size of the population and geographical area that communities represent may also pose challenges.
FEMA defines a community as a “political entity that has the authority to adopt and enforce floodplain ordinances for the area under its jurisdiction.” Although a city or town would qualify, it is unclear whether the definition could be extended to a neighborhood, a gated community, or a business district. More explicit definitions will be needed if community-based flood insurance is implemented, the report says.
Any future community-based flood insurance program must also consider who bears the risk; who writes the policy and determines coverage limits and standards; how premium costs are underwritten, priced, and allocated; who accepts the administrative capabilities; how compliance with any mandatory purchase requirements is ensured; and how pricing expertise is used in setting risk-based premiums.
The report points to an economic principle that says if the collective interests of communities and individual residents fully align and are accounted for, then the outcomes will be the same regardless of which group bears responsibility for insurance. In practice, however, there are several reasons why this may fail to hold, including when some or all residents “free-ride” and don’t buy insurance because they expect post-disaster relief.
The report lists eight such reasons that, depending on the underlying circumstances in a community, can help guide decisions about when community-based flood insurance may be more or less preferable than insuring at the individual level.
The study was sponsored by the Federal Emergency Management Agency. The National Academies of Sciences, Engineering, and Medicine are private, nonprofit institutions that provide independent, objective analysis and advice to the nation to solve complex problems and inform public policy decisions related to science, technology, and medicine. The Academies operate under an 1863 congressional charter to the National Academy of Sciences, signed by President Lincoln. For more information, visit http://national-academies.org. A roster follows.
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THE NATIONAL ACADEMIES OF SCIENCES, ENGINEERING, AND MEDICINE
Division on Earth and Life Studies
Water Sciences and Technology Board
Division on Engineering and Physical Sciences
Board on Mathematical Sciences and Their Applications
Committee on Community-Based Flood Insurance Options
Henry J. Vaux Jr.
Professor Emeritus of Resource Economics, and
Chair, Rosenberg International Forum on Water Policy
Department of Agricultural and Resource Economics
University of California
Berkeley and Riverside
Midyette Eminent Scholar of Insurance
Department of Risk Management and Insurance,
Real Estate and Legal Studies
College of Business
Florida State University
Willis Research Network Fellow
Wharton Risk Management and Decision Processes Center
Wharton School of Business
University of Pennsylvania
Director and Senior Economist
Center for Catastrophic Risk Management and Compensation
Santa Monica, Calif.
U.S. Geological Survey
Research Professor and Distinguished Scientist
Graduate School of Geography
Associate Professor of Risk Management and Insurance, and
Director, Center of Risk Management and Insurance Research
Georgia State University
Senior Research Engineer
Department of Civil and Environmental Engineering
Center for Disaster Resilience
University of Maryland, College Park, and
Founder and President
David I. Maurstad
Director and Senior Vice President
Optimal Solutions and Technologies Inc.
Head of the Coordinated Hazard Assessment and Mapping Program
Illinois State Water Survey
University of Illinois
Center for Statistical Research and Methodology
U.S. Census Bureau
Frank P. Ramsey Professor of Political Economy
John F. Kennedy School of Government
Ed J. Dunne
1Member, National Academy of Sciences
2Member, National Academy of Medicine