Skip to content

Rethinking the NFIP

An Introduction to NFIP Reform

FEMA is engaged in a participatory policy analysis effort to address the concerns of the wide array of stakeholders involved in an ongoing dialogue about the National Flood Insurance Program (NFIP).

The reform initiative is a multi-stage process designed to engage stakeholders and consider the greatest variety of public policy options. FEMA believes this important process will ensure the program can efficiently and effectively meet the needs of the public. The results of this analysis will inform decisions regarding the future of the NFIP. To this end, the process is being executed in a public policy context that recognizes the following perspectives:

NFIP Perspectives

At the intersection of each perspective is a requirement for policy reform. A sustainable and resilient outcome will balance each of the other lenses to ensure that the reform effort results in a responsible and feasible policy.

Back To Top

The Call to Reform

After more than a decade of seeking input, identifying issues, and undergoing studies, FEMA believes that the time has come to undertake a critical review of the NFIP. With Congress considering reform of the program, FEMA is prepared to assist decision-makers by providing a comprehensive analysis that will both address issues of immediate concern and establish a solid foundation for the NFIP’s future.

The following statement describes the challenges that the NFIP Reform effort seeks to address. The NFIP Reform Working Group developed it to identify and analyze options for the future of the NFIP and solicit input from internal and external stakeholders regarding the challenges facing the NFIP.

NFIP Reform Problem Statement:

Flooding continues to be the number one source of damages from natural hazards in the United States. For over 40 years FEMA has provided flood insurance to our citizens to help protect them from the financial losses associated with flooding. The NFIP complements FEMA’s mission to support our citizens and first responders to ensure that as a nation we work together to build, sustain, and improve our capability to prepare for, protect against, respond to, recover from, and mitigate all hazards. The NFIP helps individual citizens more quickly recover from the economic impacts of flood events while providing a mechanism to reduce exposure to flood through compliance with building standards and encouragement of sound land-use decisions.

The program’s many successes have also come with significant challenges. The NFIP was designed as a means of discouraging unwise occupancy of flood prone areas, yet occupancy of these areas has expanded since 1968. Additionally, as risks continue to increase, the cost of flood insurance mirrors that increase, making it unaffordable for many Americans. This is evidenced in part by the fact that 40 years after the program’s inception, only 20% to 30% of individuals exposed to the flood hazard actually purchase insurance. In essence, the primary challenge is to optimize the NFIP to balance fiscal soundness, affordability of insurance, adequate coverage for those at risk, floodplain management (reduction of flood hazard vulnerability), economic development, individual freedoms, and environmental concerns. As there is a growing public debate over individual choice and accountability versus social responsibility, we are soliciting input from stakeholders to help policymakers reshape our national flood policy.

Back To Top

The Reform Process and Timeline

The Working Group chose a participatory policy analysis framework to guide the NFIP Reform effort. Policy analysis employs systematic inquiry and evaluation to assess policy alternatives. The policy analysis process allows public decisions to be made in a structured, defensible, and credible manner. The process adopted by the Working Group employs three phases.

Back To Top

Phase I: NFIP Listening Session and Gather Stakeholder Input

Phase I began with the NFIP Listening Session in November 2009. The analysis of comments culminated in a report entitled Content Analysis of Breakout Session Comments (PDF 256KB, TXT 11KB). Phase I concluded with release of a final report entitled NFIP Stakeholder Listening Session: Findings and Next Steps (PDF 1MB, TXT 300KB).

Back To Top

Phase II: Establish the Policy Analysis Framework

Phase II began in March 2010 with the formation of the NFIP Reform Working Group, which comprised a cross-section of Federal Insurance and Mitigation Administration (FIMA) Directorate staff. During Phase II, the Working Group identified the guiding principles for the reform effort and crafted evaluation criteria to steer the policy analysis. This Phase II effort incorporated the recommendations and themes resulting from the NFIP Listening Session and web comments as well as prior research and studies. The Working Group concluded this phase in May 2010 and released a final report entitled NFIP Reform: Phase II Report (PDF 703KB, TXT 31KB).

NFIP Reform Guiding Principles

The guiding principles serve as a set of concepts that could be agreed upon by the majority of NFIP stakeholders and serve as the foundation for any proposed policy solution. The guiding principles serve as a basis for establishing proposed policies but are not fully sufficient for evaluation of those policies since they do not possess a directional nature. The Working Group used the guiding principles to develop a list of evaluation criteria.

The NFIP Reform Guiding Principles 

Evaluation Criteria

The Working Group developed evaluation criteria by reviewing stakeholder viewpoints. The evaluation criteria serve as a compass for the policy analysis process, setting the direction by which the proposed policy alternatives are scored and evaluated.
The results of this analysis were aggregated and incorporated as the final set of evaluation criteria.

Evaluation Criteria

Narrative Descriptions of the Evaluation Criteria

Cost of flood is borne by individuals
A national flood policy should encourage individuals to assume the risk of flooding to their property (and secondarily, communal and public resources) commensurate with the level of risk they have taken on through personal choices. When individuals realize these costs, they will rationally account for their flood risk when making decisions. These individual costs are relative to the costs assumed by other taxpayers through federal disaster assistance.

Individuals incur costs of increased risk gradually
Floods are a dynamic and uncertain risk. The actual risk, the assessment of that risk and, ultimately, the cost of the risk, can change. When faced with substantial cost increases because risk has changed, individuals may react by rejecting the assumption of risk. A national flood policy that allows for gradually increasing costs will encourage individuals to voluntarily purchase flood insurance and participate in assuming the cost of their risk.

Assistance is provided to those who cannot afford the cost of flood
Some living at risk of flood cannot afford the cost of protecting themselves from this risk, nor can they afford the cost to avoid the risk. A national flood policy should address the financial needs of this population.

Minimize exposure to flood hazards
Occupancy rates in areas exposed to the flood hazard are increasing. Furthermore, individual and collective actions throughout our nation’s watersheds often result in an increase in society’s exposure to the flood hazard. A national flood policy should minimize exposure to flood hazards to avoid loss of life and property.

Maximize natural and beneficial functions of the floodplain
Managing the quantity of water (too much or too little), water quality, and the habitat of fish and wildlife complement activities to reduce flood losses. A national flood policy should seek to maximize natural functions of the floodplains as a means to reduce flood losses and support community sustainability.

Efficiency - Maximize the benefit/cost ratio
Any policy designed to protect the nation’s citizens from flood hazards will have economic impacts. A national flood policy should maximize the economic benefits relative to the economic costs.

Administrative feasibility
Administration of the nation’s flood policy may require involvement by governments at federal, state, tribal and local levels. A national flood policy should minimize the complexity of these interactions and the costs associated with the potential transition to and operation of a flood program.

Political acceptability
There are many contradictory viewpoints regarding the solution for addressing flood hazards. A national flood policy must balance and preserve these perspectives to ensure its successful adoption, implementation and long-term sustainability.

Weighting the Evaluation Criteria

The final task in Phase II was to weight the evaluation criteria to reflect their importance. The Working Group selected a pair-wise comparison method to allow interested stakeholders to weight the criteria. Pair-wise comparison is a process in which participants compare entities in pairs to determine which element in each pair is preferred. The individual results are then aggregated to produce a weight for each entity. The Working Group also asked participants to identify the strength of their preference using a 1-9 rating scale.

To learn more about the Reform process and criteria being used to evaluate the Reform options, download the PDF: (PDF 1.8MB, TXT 14KB)

Back To Top

Phase III: Identify and Analyze Public Policy Alternatives

During Phase III, the Working Group identified and developed a set of policy alternatives to consider in the reform effort. After the alternatives were vetted and refined, the Working Group evaluated the proposed policy alternatives and scored them using the criteria and weighting described above. The set of policy alternatives were then evaluated by an independent economic and public policy consulting firm, Keybridge Research. The Working Group concluded this phase in June, 2011, and released a final report entitled NFIP Reform: Phase III Report that was submitted to FEMA leadership and the Administration (PDF 258KB, TXT 30KB)

The key findings in the Phase III analysis concluded that:

Policy Options: The Current NFIP & Alternatives for Reform

During the first stage of Phase III, the Working Group worked to identify and develop a set of four policy alternatives to the current program. Refined through internal deliberations, a public comment period and a series of public meetings, these "pure" policy alternatives represent distinct philosophies regarding the federal government's role in the provision of flood insurance. They are intentionally provocative and represent a broad range of possible pathways forward. The following sections provide brief summaries of the current program and the four policy alternative evaluated.

Current NFIP

Under the existing NFIP framework, the federal government provides flood insurance in participating communities to cover flood-related losses and damages sustained by residential and commercial structures. Although all flood risk insured under this program is underwritten by the federal government, policies are written and serviced by private Write-Your-Own (WYO) insurance companies. FEMA dictates minimum floodplain management standards, and also identifies flood hazards by producing Flood Insurance Rate Maps (FIRMs). Not all premiums reflect full risk rates; the program provides for some structure-based subsidies for structures pre-dating the publication of a community’s FIRM. Community participation in the program, and access to federally-backed flood insurance for individual property owners within that community, is voluntary and contingent upon community adoption of minimum floodplain management standards and the FIRM. A mandatory purchase requirement (MPR) applies to residential and commercial structures with federally-backed mortgages that are located in Special Flood Hazard Areas (SFHAs). Enforcement of the MPR is delegated to mortgage lenders. Additional provisions under the program incentivize the adoption of standards and mitigation beyond the federally mandated minimums.

NFIP Modified

NFIP Modified outlines modifications to the current program in order to address key weaknesses and challenges while building upon its existing strengths and benefits within the existing policy framework. Options for program modifications include addressing the actuarial soundness of the program and insurance affordability; improving flood hazard identification and mapping to better identify risk; improving floodplain management standards to reduce risk; addressing environmental compliance issues; and, improving incentives to promote better mitigation.

Privatization

The Privatization option explores ways to expand the role of the private sector in servicing and underwriting flood insurance policies. There are many potential benefits associated with leveraging the private sector, including greater innovation, greater market penetration, and the consistent, actuarial pricing of flood risk. This option also comes with a set of challenges to address, such as ensuring that private insurance companies have freedom to set rates and design their own forms, overcoming adverse selection, and avoiding the risk of insurer insolvency after a catastrophic event. For the purposes of this evaluation, it is assumed that the federal government will retain a residual market for uninsurable properties.

Federal Assistance

Under the Federal Assistance option, federally-backed flood insurance would be replaced by expanded eligibility for disaster assistance. The federal government would provide disaster assistance only in communities that enact flood mitigation and preparedness measures. Failure of a community to enact such measures could result in a significant reduction in federal disaster assistance and ineligibility for pre- and post-disaster grants. The Working Group explored two policy models in this option. Under the first model, the Community Rating Model, more rigorous mitigation and preparedness measures voluntarily enacted by a community would be rewarded with a greater percentage of damages being eligible for disaster assistance and a more favorable the cost share for other federal mitigation programs. In the second model, the Federal-Private Loss Share Model, the federal government would cover a greater portion of public and private flood disaster losses for all participating communities. However, with a greater financial commitment for disaster losses, the federal government would also require significantly higher mitigation standards as a condition for community participation. For the purpose of evaluation, it is assumed that the Community Rating Model is implemented and that the distribution of communities along the sliding cost share scale corresponds to the distribution of communities in the current Community Rating System program.

Community Based Insurance

Under the Community Based Insurance option, the federal government would continue to offer flood insurance in exchange for community adoption and enforcement of minimum floodplain management standards. The federal government would also continue to issue FIRMs and perform structure-based risk assessments. However, under this policy, communities – not the individual property owner - would be the policyholder. The single, community-wide premium would be determined by aggregating the dollar sum of all the individual risk assessments conducted on structures throughout that community. For the purposes of evaluation, it is assumed that participating communities would generally choose to distribute the cost of the premium according to an individual's assessed flood risk, and that non-CRS communities would elect to not participate in the program.

Analytical Approach

In the second stage of Phase III, the four policy options and current NFIP were analyzed relative to the eight evaluation criteria. The policy analysis phase consisted of two distinct approaches: (1) a qualitative approach utilizing expert panel assessments and (2) a quantitative approach utilizing data analysis. While the expert panel assessments considered all eight criteria in evaluating the policy alternatives, due to data and resource constraints the data analysis was more limited in scope, evaluating the alternatives against five of the criteria. To learn more about the different methodologies employed by these two approaches, download the report: Reforming the National Flood Insurance Program: An Evaluation of Policy Alternatives (PDF 258KB, TXT 30KB).

Conclusion: Toward a Consensus Recommendation

The results of the analysis phase clearly indicate that reform is needed, but they are more ambiguous regarding the best approach forward.

Both the expert panel assessment and data analysis indicate that each policy has its own unique mix of strengths and weaknesses. The Working Group believes that, rather than narrowing in exclusively on one pure policy option, the reform effort should focus on integrating features from multiple policies. Specifically, the Working Group believes that the reform effort should focus on developing a hybrid policy that integrates the NFIP Modified approach with select elements from the Community Based Insurance, Federal Assistance, and Privatization models. If designed properly, such a hybrid policy has the potential to leverage the unique strengths of each pure policy option to meet the public's need for flood insurance in a more effective, efficient, and equitable manner. Accordingly, the Working Group has initiated Phase IV of the reform process with the purpose of designing, refining, analyzing, and recommending a fully articulated consensus recommendation.

Back To Top

NFIP Reform Public Meetings

In December 2010 FEMA hosted two public meetings in Washington, D.C., and Denver, Colorado, to describe, update, and explain the policy options for deliberation and to answer questions and hear comments from interested stakeholders.

Through these public meetings, FEMA accepted stakeholder input on the evaluation criteria through the pair-wise comparison worksheet and gathered input on the strawman policy alternatives.

Details of the public meetings will be posted to this site in the near future.

Back To Top

Answers to Questions about NFIP Reform

Why is FEMA undertaking this effort now?

After more than a decade of seeking input, identifying issues, and conducting studies, FEMA believes that the time has come to undertake a critical review of NFIP. With Congress considering significant reform of the program, FEMA is prepared to assist decision-makers by providing a comprehensive analysis that will both address issues of immediate concern and establish a solid foundation for the NFIP’s future.

Who will be conducting the analysis?

FEMA established the NFIP Reform Working Group to identify and analyze options for the future of the NFIP. This internal working group is a cross-section of the Federal Insurance and Mitigation Administration.

How does this work relate to efforts by FEMA and others in recent years?

The Working Group will consider the analysis, input, and advice collected in recent years. In addition to input gathered from the Listening Session, other resources will include:

A number of national efforts addressing water resources are currently underway. Does FEMA intend to consider these initiatives?

The NFIP reform effort will consider initiatives internal to FEMA and across the Federal government. Examples include:

Will FEMA engage stakeholders through this process?

The NFIP Reform Working Group recognizes the value of a participatory policy process.  To provide comment on the NFIP Reform effort, please send emails to FEMA-NFIP-Reform@dhs.gov.

 

Back To Top

Download Plug-in

Some of the links on this page require a plug-in to view them. Links to the plug-ins are available below.

Click Here to Download Adobe Acrobat Reader Adobe Acrobat (PDF)

Last Modified: Monday, 31-Oct-2011 12:07:00 EDT