The Future of the National Flood Insurance Program

Principal Investigator: 
Performance Period: 
July 2013 to June 2014
Commercialization Status: 
The proposed studies build on ongoing research with CREATE on flood risk insurance in the U.S. that will be conducted in close collaboration with the top management of FEMA at the U.S. Department of Homeland Security. Floods are the one natural disaster where the federal government currently plays a major role in designing and implementing strategies for reducing future losses and aiding financial recovery through the National Flood Insurance Program (NFIP). Hurricane Sandy devastated the New York/New Jersey region, triggering $60 billion in federal relief. The disaster revealed the limited amount of flood insurance by those suffering damage  (4 out of 5 victims did not have flood insurance despite living in flood prone areas). The Program also had to borrow nearly $10 billion from the Treasury to pay its claims, increasing its debt to nearly $27 billion.  In July 2012 the President signed the National Flood Insurance Reform Act (NFIRA)—a significant piece of legislation designed to provide more accurate information on the nature of flood risk by improving the quality of publicly available flood maps across the nation. It also phases in risk-based premiums for policyholders with second homes or homes subject to repetitive flooding and authorized a study on affordability. The transition period is 5 years for homeowners currently benefiting from subsidized flood insurance rates. The complaints of many residents in flood-prone areas on the rapid increase in premiums due to the new legislation, led Congress to pass the Homeowner Flood Insurance Affordability Act in March 2014 that delays these premium increases. The research we conduct will suggest ways to address these problems through the development of long-term strategies by undertaking empirical analyses using the NFIP database that has been provided by FEMA to the Wharton Risk Center. Incentivizing or requiring homeowners and small businesses to invest in loss reduction measures and insurance prior to a disaster and developing strategies for rapid economic recovery after a catastrophe are national priorities with respect to alleviating the impacts of natural hazards.  We focus on residents and small businesses in the New York area to measure their perceptions of flood-related risks and their decision making process with respect to purchasing insurance and investing in risk-reduction measures.   In 2014 we have been analyzing data from a large residential survey in New York City and relating it to relevant studies on protection prior to a disaster and recovery following a loss. The survey was completed with Wouter Botzen from the Netherlands (visiting scholar at Wharton) and covers the following topics: • Homeowners perceptions of the flood risk  • Current investment in mitigation measures • Knowledge of the availability of flood insurance  • How much  flood coverage residents currently have as a function of their past flood related losses  • Expectation of disaster relief from the government following a flood—related loss  In late 2014 and 2015 we will expand this analysis to include small businesses that comprise almost all firms in the United States and 47% of US Gross Domestic Product (GDP). These businesses are not diversified geographically, have limited insurance and have difficulty accessing credit following a severe loss so they are particularly vulnerable to disasters. A recent survey of small business by the NY Federal Reserve revealed that only 8 percent of the small businesses had flood insurance.  The Wharton Risk Center is interacting with the NY Federal Reserve and the Small Business Administration to better understand the challenges small businesses face and will interface with CREATE and DHS on findings that emerge from this collaboration.  The studies by the Wharton Risk Center assist DHS/FEMA and Congress so they can improve the effectiveness of the National Flood Insurance Program while addressing issues of equity and affordability. We continue to interact closely with FIMA’s team on these issues. At a recent conference call with DHS’s S&T, CREATE and our team they confirmed their high interest in this research and their willingness to share address-level data on the NFIP with the Wharton team given the existing relationship through CREATE. We will access these data in the near future with respect to policies purchased and approved claims. The research generates new empirical evidence on residential and small business flood insurance and risk financing strategy. The analyses of these data should enable us to propose innovative solutions that can inform the current public policy debate about designing and implementing a more sustainable flood insurance program that scores high both on efficiency, affordability and equity grounds.