This is an excerpt of a policy memo on flood risk, originally written as an exercise in understanding the United States National Flood Insurance Program.
Advancing Financial Equity in the National Flood Insurance Program
As climate change advances, future flood risk is expected to escalate
across the country, either due to rising sea levels, intensified
precipitation, or infrastructure development. It is expected that
households presently not in high-risk flood hazard areas will become so
in coming decades and will be adversely exposed to higher risks,
especially due to lingering problems in the way flood mapping dictates
flood insurance rates today. The National Flood Insurance Program (NFIP)
needs to be reformed urgently to ensure flood risk does not
disproportionately impact vulnerable communities, and Congress has an
important role to play in authorizing necessary reforms and
appropriations.
Climate-Induced Flood Risk: A Rising Concern
Flooding has fast become the most frequent, most intense, and costliest
natural disaster in the United States (U.S.), with the 2022 season being
termed the ‘[summer of floods]{.underline}’ in general media.
Coastal/inland flooding as well as flash floods due to tropical storms
and hurricanes have caused more financial damage than any other type of
extreme weather-related event.
Sea-level rise has already led to increased probability of coastal
flooding, with projections indicating significant flood damage expected
in the future. Rainfall has intensified and is projected to
contribute towards heightened flood risk. This is further impacted by
policy decisions regarding societal land use and development that have
long ignored climate effects and nature-based solutions.
FEMA’s Flood Maps Underestimate Risk
The Federal Emergency Management Agency (FEMA) is a central figure in
the nation’s response to flooding, responsible for administering the
NFIP, with the primary goals of providing affordable flood insurance
coverage to property owners and reducing the financial impact of such
events on communities.
A key function of this program is the development of flood hazard/risk
mapping and analysis via the Flood Insurance Rate Maps (FIRMs) to
support how FEMA sets insurance rates across the country. FEMA’s flood
maps have long been considered the gold standard for understanding flood
risk in the U.S., despite its many flaws. However, a growing body of
research has indicated that these maps underestimate flood risk, and
do not account for climate change induced effects, or future risk.
These maps have been questioned for many other reasons: for using
poor data, not capturing rainfall flooding, for creating risk
misperceptions and for being out of date and rarely updated, and FEMA
has been called out repeatedly in recent decades to modernize its flood
mapping functions. The Future of Flood Risk Data (FFRD) Initiative
that it announced in late 2020 was a significant first step in this
direction, with the goals of shifting from binary to a graduated risk
analysis and updating the management of and delivery of flood risk data.
NFIP in a Complacency Trap
In the years since the Biggert-Waters Flood Insurance Act of 2012,
the NFIP has been identified as a ‘High-Risk Area’, requiring dedicated
leadership to address the lack of progress made by FEMA in modernizing
and safeguarding its insurance program. As of 2021, research indicates
that new legislation will likely be required to effectively address
the issues of the NFIP. Recommendations to update the NFIP’s
rate-setting methodology have been documented as early as since
2008. However, it has been only in the last year that FEMA made
concrete steps towards this major reform with the rollout of its Risk
Rating 2.0 (RR2.0), with the goal of delivering more equitable
pricing. While a welcome step, it has been a long time coming.
Silvis, V.G. (2018) applied a systems perspective to the NFIP and
identified four “deadly” traps that the program has succumbed to
throughout its history, from ideation in 1968 to its current
reevaluation. These have surfaced at different stages of the policy
cycle:
(i) a lack of sound theory during ideation and instead, a focus on
increasing insurance uptake rates as a measure of effectiveness,
(ii) compromises made in handing over implementation of land-use
guidelines to local communities to pass the legislation,
(iii) an inability to recognize the external factors influencing the
behaviors of local communities, especially from local developers,
and little regulation of compliance with its land-use controls,
(iv) a complacency that has set in since the 2012 Act, with little push
for change from the status quo.
Inequity in Flood Impact and Financial Recoveries
The social vulnerability to climate change in the U.S. is heterogeneous,
with a growing body of literature projecting disproportionate and
unequal risks on communities that are least able to anticipate, manage
and recover from extreme climate impacts. This is also true for
coastal and inland flooding, as evidenced in a recent EPA report,
which found minorities are most likely to live in areas where analyses
project highest levels of climate change impacts with 50 cm of global
sea level rise.
Congress has made regular provisions to keep pace with advancements in
technology and open data governance structures, with presidential
directives such as The 2009 Memorandum and The Open Data Memo,
or with federal legislations. Much of NFIP relevant data has been made
publicly available, especially after the NFIP reforms of 2012 and 2014
directed FEMA include data on its flood map update and appeals
functions, despite some prominent exclusions earlier. This has
enabled much retrospective research into the effectiveness of the NFIP,
using county-level datasets.
Wilson (2019) found that the time taken to adopt these maps varied
substantially across the nation, far beyond FEMA’s estimates and
standards, and that the timing of flood map revisions varied between
communities of different incomes. Lea (2022) further surfaced
discernable trends in how buildings are added/removed from flood zones
on these maps, particularly that they are more frequently altered in
regions where the median home values are higher, buildings are newer,
and the percentage of white populations are higher, indicating
inequity based on socioeconomic means for appeals and revisions made
to the FIRMs by property residents and community stakeholders. Blickle
(2022) analyzed the impact of the NFIP’s “quasi-mandatory” insurance
requirements and found that the added financial burden of flood
insurance led to limited access to credit for low-income
borrowers.
During the 2022 Hearing on Reauthorization and Reform of the NFIP, a
case was made that racial minorities and lower income groups are
subject to a greater negative economic shock during severe floods, and
thereby recover less quickly than more privileged residents, primarily
due to a lack of access to the required financial resources for repairs
and rebuilding.
Addressing Affordability in the NFIP
NFIP’s RR2.0 is a response to longstanding concerns regarding the policy
and practice of grandfathering insurance premiums, following
repeated recommendations from government stakeholders. FEMA’s goal
with RR2.0 is to make insurance rates more equitable, since the previous
methodology perpetuated a biased cross-subsidy between low-value and
high-value homes. It is also expected to simplify the writing
process for insurance agents and reduce insurance mispricing errors as
seen under the previous practice.
However, this is not expected to usher in equity immediately. Congress
has long deliberated on NFIP affordability issues and a means-tested
assistance program, with FEMA even undertaking an affordability
framework study as directed by the 2014 legislation.
FEMA presently does not have the authority, or the funds required to
implement and support such a program. Congressional intervention and
appropriations will be a key driver in progressing this issue, as put
forth by investigations from multiple groups, including GAO, CRS,
The National Research Council, RAND Corporation, independent
researchers, and FEMA itself.
Conclusions & Recommendations
FEMA is moving toward more active stakeholder engagement. The agency
published a public Request for Information for comments on the NFIP’s
Floodplain Management Standards, and received over 360 responses from
various stakeholders, both government and private, including the Natural
Resources Defense Council (NRDC), Fannie Mae, Association of State
Floodplain Managers (ASFPM), Union of Concerned Scientists (UCS) and
several others.
Recommendations range from improved flood mapping solutions, FIRMs and
nonregulatory products, integration with new types of private insurance
schemes for the disaster insurance market to additional funding
support for low-to-medium income communities to mitigate risk and reduce
exposure, integration of climate change science into NFIP minimum
standards and maintenance of insurance affordability through NFIP
reforms.
FEMA’s Affordability Framework report has already suggested assistance
programs to enable equitable flood insurance coverage, and research has
established that the federal approach to disaster recovery needs
improvement across agencies, particularly in prioritizing funding for
vulnerable communities. The CRS has laid out multiple options for
Congress to consider in making the NFIP affordable, including the
introduction of a means-tested affordability program, reducing NFIP
debt, increasing mitigation activities, amongst others.
A reform of the NFIP is imminent in order make available federal
appropriations for flood-related financial resilience in these
communities. This is a significant opportunity for the U.S. House
Committee on Financial Services to revisit recent bills regarding NFIP
affordability and for members of the House to push for financial
equity across the nation in the face of future climate risk.
Disaster insurance plays a key role in fostering resilience of
communities against negative financial shocks, and the benefits of such
insurance should be accessible by all. The above recommendations,
amongst others, are expected to reduce the risk exposure of particularly
vulnerable communities in the wake of adverse flooding impacts, and the
House Committee on Financial Services is well positioned to focus future
federal spending in support of this goal.
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