Press Release

RFF Paper Examines Community Flood Insurance

Dec 10, 2015

Many US areas are vulnerable to floods. However, the purchase of flood insurance, an important contributor to community resilience, remains low. Insurance payments, unlike federal disaster aid, can provide more rapid and higher payouts to households after a disaster and the pricing structure can be used to incentivize investments in risk reduction. To increase insurance coverage, one idea often suggested is for community jurisdictions to purchase flood insurance on behalf of floodplain residents. Despite interest in the topic, the practicality of a community policy has not been examined in detail.

Today, however, Resources for the Future has posted a new report: A Proposed Design for Community Flood Insurance. The authors are RFF Fellow Carolyn Kousky and Resident Scholar Leonard A. Shabman. The ideas contained in the report are based on in-depth consultations with stakeholders, including staff from local governments, nonprofits focused on flood risk, representatives of federal agencies, congressional staff, private (re)insurers, and academics.

This report presents one detailed design option that could be attractive for communities and feasible to offer by the National Flood Insurance Program (NFIP), a private (re)insurance company, or a municipal pool. The report proposes a community policy design grounded in principles of parametric insurance, whereby payment is based on a predefined disaster event. Parametric insurance is increasingly being offered in international contexts as a way to increase financial resilience to weather-related disaster events.

The benefit of a parametric design is that it simplifies the process and reduces the costs of settling claims, and the administrative savings can be passed on the community. The proposed design would have the community policy provide a modest base layer of coverage. Residents could purchase supplementary coverage for higher limits or to eliminate the basis risk, or risk that the claim does not fully cover damages, of a parametric policy.

The authors state that moving from concept to implementation will require additional work. It is not envisioned as a full replacement for individual policies. Still, community policies could be a resilience-enhancing tool for a subset of interested communities.

The authors further discuss an array of choices for moving forward. Read the full report: A Proposed Design for Community Flood Insurance.

Funding for this study was provided for by New York Community Trust.

Resources for the Future (RFF) is an independent, nonpartisan organization, based in Washington, DC, that conducts rigorous economic research and analysis to improve environmental and natural resource policy.