Maintain Insurance Affordability but Provide Accurate Risk-Based Price Signals

The Challenge

Recent reforms to the NFIP require insurance premium subsidies to be phased out, possibly causing rate increases which will make insurance unaffordable for many property owners and businesses with limited or fixed incomes. Policyholders face increases in rates of up to 18 percent annually until they reach the full-risk (or ‘actuarial’) rate. Rising rates threaten those with modest means or fixed incomes, who may be forced to drop coverage or be displaced if they cannot afford the added costs. Rising rates can also affect a home’s resale value, which can have economic consequences for property owners whose homes are often their biggest asset and ‘nest egg’ for savings.

Additionally, the NFIP limits coverage for multifamily buildings (currently capped at $500,000 for the building and $100,000 for the contents), which leaves many structures underinsured. This is problematic for cities facing severe affordable housing shortages, as gaps in coverage can, for example, prevent a landlord from making needed repairs after a flood loss, leading to displacement of residents. And while cities need insurance rates to send accurate price signals about the risks of building and residing in flood hazard areas, they also need affordable flood insurance options that provide adequate coverage to help homeowners, landlords and businesses get back on their feet after a disaster.

The Opportunity

In reauthorization, reforms need to be made to the NFIP to acknowledge the importance of flood insurance for the economic security of families and businesses, especially those with limited financial means. The NFIP should offer means-tested assistance to ensure that no household is displaced or forced out of coverage because of the rising costs of flood insurance. Means-tested assistance should clearly communicate the full-risk rates that are being offset, and provide support to help property owners and business reduce their flood risks with mitigation measures. The NFIP should be reformed to increase coverage or encourage private excess coverage for multifamily properties, to ensure adequate coverage based upon the size and uses of buildings.

Action Steps

Legislative

Congress should maintain rate increases but give FEMA explicit direction and authority to offer means-tested assistance (possibly in the form of vouchers) for low- and moderate-income property owners, with the goal of funding measures to reduce flood losses and qualify properties for lower insurance premiums. Special assistance for mixed-use, multifamily, and difficult to retrofit structures (such as attached rowhomes or historic structures) should be considered.

Congress should explore options for expanding coverage, through both government and private sources, to increase the number of properties insured and the completeness of coverage for different types of structures and risks. For example, Congress could create incentives for owners of multifamily structures to purchase excess coverage for damages exceeding the current NFIP cap.

Retrofitting Buildings for Flood Risk
To address the dual challenges of increasing climate- driven flood risk and rising insurance rates, New York City commissioned studies on strategies to preserve insurance affordability for different types of buildings, including one-to-four-family buildings and larger multifamily buildings, through combinations of retrofits and subsidies. The city also developed a manual providing specific guidance on the most appropriate flood-resilience retrofits for the city’s most common building types, many of which cannot be protected using traditional methods, such as elevation.
Katherine Greig
Deputy Director, NYC Mayor’s Office of Recovery and Resilience

Executive

FEMA should continue to take steps to send accurate risk-based price signals to property owners in flood-hazard areas. FEMA should be encouraged to communicate the full-risk insurance rates for a property (even where the rate is ultimately discounted), and provide transparent data and information on coverage and policies for multifamily and mixed-use buildings.

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