Making Flood Insurance Affordable
The National Flood Insurance Program (NFIP) found itself floundering in debt after Hurricane Katrina devastated the Gulf Coast, sparking a legislative push to overhaul it. The result was a risk-based pricing plan under the Biggert-Waters Flood Insurance Reform Act, signed by the president last July after passing with wide bipartisan support.
But recently, questions about the program’s affordability have left many legislators feeling nervous—feelings that could be put to rest by linking risk-based pricing with government-supported measures taken by homeowners to keep their properties safe and to make insurance more affordable for low and middle-income families.
In a recent paper, we propose the use of a voucher program based on a policyholder’s ability to pay in order to put flood insurance within reach for those at high risk. But to qualify for the program, the homeowner would also agree to undertake loss-reduction measures, made more affordable through a loan program and an accompanying reduction in their NFIP premium.
Instead of placing this voucher program within the Federal Emergency Management Agency, we propose that it be placed in the US Department of Housing and Urban Development (HUD)—and possibly modeled after HUD’s own Section 8 Housing Vouchers Program. In this way, vouchers would operate parallel to the NFIP, and cover a portion of both premium increases as well as loans aimed at loss mitigation for those with qualifying income.
In our opinion, risk-based pricing in the NFIP is critical to inform individuals and communities of the hazards they face. It is also needed to maintain the financial soundness of the program. But very high rates should not lock families out of financial protection because they cannot afford to pay. A program that addresses affordability explicitly in a means-tested manner—while at the same time reducing risk through hazard mitigation investments—can be beneficial for everyone.
About Howard Kunreuther
Howard C. Kunreuther is the James G. Dinan Professor; Professor of Decision Sciences and Business and Public Policy at the Wharton School, and co-director of the Wharton Risk Management and Decision Processes Center. He has a long-standing interest in ways that society can better manage low-probability, high-consequence events related to technological and natural hazards.
About Carolyn Kousky
Carolyn Kousky is a fellow at Resources for the Future. Her research focuses on natural resource management, decisionmaking under uncertainty, and individual and societal responses to natural disaster risk.
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