Blog Post

Expanding Flood Insurance Coverage through Community Purchase

This post includes edited excerpts from a new RFF report—A Proposed Design for Community Flood Insurance.

Communities across the Midwest are still drying out from the recent winter floods. Historic flood crests made news in the last days of 2015 and flood waters are now pushing down the Mississippi as nearby communities prepare to be inundated.

After floods, from Hurricane Sandy’s storm surges to recent events in South Carolina and the Midwest, it has often been found that many residents with flooded homes did not have flood insurance. This could be because they were not given accurate information about their flood risk, or they could have been overly optimistic about whether their houses would be damaged by a flood. Or maybe they assumed they were covered by their homeowners policies. Whatever the reason, a lack of insurance leaves many without financial resources to speedily recover after the waters recede.

Insuring those at risk of flooding can promote household as well as community resilience. Insurance claims payments, unlike inadequate and unreliable federal disaster aid to households, can provide faster and higher payouts after a disaster. In addition, the insurance pricing structure can encourage investments in future risk reduction.

As one way to get more people covered, communities could purchase flood insurance on behalf of floodplain residents. Although the idea has been discussed over the years, it has never been examined in sufficient detail to allow an evaluation of its potential for improving resilience or its administrative and political feasibility.

Community flood insurance is a single policy purchased by a local governmental or quasi-governmental body providing coverage for a group of designated properties. In a recent RFF report, we present a detailed design for community insurance that could be attractive to some communities and their residents and be a feasible offering of the National Flood Insurance Program (NFIP) or a private (re)insurance company. The specific features of the insurance policy reflect the concerns and insights raised in interviews with staff from local governments, federal agencies, Congress, nonprofits focused on flood risk, and private (re)insurers, as well as academics.

As envisioned, the insurance policy would pay a fixed claim amount, with the maximum claim capped at a relatively modest level, when a predefined “triggering event” occurs—in this case, flood stage reaching a certain height on a river or tidal gage. This design is inspired by parametric insurance products, which are based not on the actual damage the insured entity sustains but on a physical measure of the flood event.  This policy design simplifies the process of setting the premium and greatly reduces the cost of settling claims. These administrative savings can be passed on to the insured. The policy design also includes an opt-out provision for homeowners who prefer to remain uninsured.

Since the maximum claim is capped, the community premium would be low. A property owner could eliminate the “basis risk,” or risk that the capped payment would not fully cover damages, by purchasing complementary coverage. In fact, the proposed design envisions the community policy as the first increment of a layered approach to full flood coverage, with the next layer being a supplemental policy purchased from the traditional NFIP or a private insurance company.

 

This work was funded by The New York Community Trust as part of its efforts to strengthen the climate resilience of shoreline communities across the country.

Read the full report: A Proposed Design for Community Flood Insurance.