Rethinking the NFIP: An Update on NFIP Reform September 2011 Contents • Reform Overview • Evaluation of the Policy Options • Phase III Report • Next Steps: Phase IV REFORM OVERVIEW What does success look like? . A Reauthorized NFIP . Reform Recommendations that:. Describe a 20-year vision for the NFIP . Address near-term “hot issues” in context of the future state . Consider expert judgment and best practices . Include key elements for initial program changes (incremental changes toward the target state) C:\Users\ewexler\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\NXT10CJ7\MC900318860[1].wmf Incremental steps toward the long-term policy direction Best Practices “Hot” Issues Consensus Recommendation NFIP Public Policy Reform Process • Evaluation of Policy Alternatives • Publication of Analysis Findings Phase III •Listening Session •Analysis of Comments •Phase I Report Phase I •Additional Analysis •Development & Weighting of Criteria Phase II Phase IV • Application of Analysis Findings •Development of Consensus Recommendation Phase I and II Summary Phase I: • Listening Session held November 5-6, 2009 in Washington, DC ~ 200 participants ~ 1,285 comments • Web Comment period open from November to January ~ 165 comments • Issued final report entitled “NFIP Stakeholder Listening Session: Findings and Next Steps” –April 2010 Phase II: • Adopted a policy analysis framework to guide the reform effort • Developed and adopted guiding principles • Adopted evaluation criteria to be used in evaluating each of the proposed policy alternatives (to be developed in Phase III) • Issued final Phase II Report –September 2010 Evaluation Criteria The Weighted Criteria In Phase III, the Working Group identified, developed and refined five policy options for evaluation. Policy Theme 1: NFIP Modified Policy Options • This strawman policy proposal seeks to make enhancements to the existing program to address programmatic weaknesses and current challenges while maintaining the current NFIP framework • Two policy alternatives have been proposed under this theme to reflect varying levels of legislative and regulatory modification: . Program Upgrade . Program Optimization • Modifications to the existing program have been mapped against the review criteria to identify those with the greatest impact Policy Theme 2: Privatization Policy Options • Under this theme, FEMA is seeking the optimal balance of shared flood coverage between the private and public sectors • Increasing the private sector’s role provides some advantages:. Innovation (improved rating, marketing, products) . Increased market penetration, leading to a reduction of Federal cost burden . Improved credibility in FEMA risk communications and increased focus on Mitigation versus Insurance sales Policy Theme 2: Privatization Policy Options (cont’d) • Challenges to privatization continue to exist:o We are seeking short and long-term solutions to these challenges. Note that for each challenge, example solutions are offered in parentheses. . Rating Freedom (Federal rate setting that bypasses state regulators; Federal reinsurance set at low thresholds; exemption from state regulation) . Adverse Selection (Better flood analysis tools; mandatory purchase clauses) . Catastrophic Losses (Federal reinsurance; national risk pools; Federal government carries residual pools) Policy Theme 3: Community Policy Options • This policy proposal seeks to establish a direct link between the land use and construction decisions of a community and the full cost of flood. • FEMA is exploring a communitywide insurance policy under this theme; • While some communities have reservations about this approach, others have expressed interest in this policy option. Points of discussion include methods for risk assessments and methods for premium collection. Policy Theme 4: Federal Assistance Policy Options • This policy proposal examines the question of “who pays” for the cost of flood and explores ways to manage the escalating costs associated with the flood hazard. • The options proposed recommend creating a quid pro quo system which ties to the availability of federal disaster assistance and other federal investment with a community’s enacted mitigation measures. • Two options are proposed, each representing opposite ends of the spectrum of “who pays”(see next slide). Policy Theme 4: Federal Assistance Policy Options • Community Rating Model -A community rating would determine local cost-share for disaster assistance, flood control projects (USACE), and other federal projects.. Advantages: Greater flexibility of implementation on the part of the community. Could also include “community resiliency” measures. . Concerns: Would need to account for small and impoverished communities. • “Total Federal Responsibility” Model -Local communities enact minimum mitigation measures (land use measure, mitigation planning, etc.) in exchange for full protection through disaster assistance.. Advantages: With promise of “full coverage,” communities may be willing to adopt more rigorous minimum standards. Higher mitigation standards could ultimately mean less federal liability in the long run. . Concerns: Could create substantial federal liability, esp. in the short run. EVALUATION OF THE POLICY OPTIONS The Evaluation Process: A Two-Pronged Approach Institution/Affiliation Texas A&M University The Wharton School, University of Pennsylvania University of Washington RAND Corporation Arizona State University University of ColoradoBoulder Georgia State University Harvard Business School Resources for the Future University of Minnesota University of Georgia Washington & Lee University NFIP Reform Expert Panels Criteria Policy Options Current NFIP NFIP Modified Privatization Federal Assistance Community Based Costs ofFlood Borne by Individuals 5 2 1 4 3 IndividualsIncur Costs Gradually 2 1 3 5 4 AssistanceProvided to Those Who Cannot Afford the Cost of Flood 5 1 3 2 4 MinimizeExposure to Flood Hazards 4 3 5 2 1 MaximizeNatural & Beneficial Functions of the Floodplain 4 2 5 1 3 Efficiency 4 2 1 5 3 Administrative Feasibility 2 1 3 4 5 Political Acceptability 3 2 1 4 5 Expert Panel Assessment: Policy Rankings by Criteria 1 2 3 4 5 Most Likely To Meet Criteria Least LikelyTo Meet Criteria Criteria Current NFIP NFIP Modified Privatization Federal Assistance Community Based Cost of Flood is Borne by Individuals Individuals Incur Costs Gradually AssistanceProvided to Those Who Cannot Afford the Cost of Flood Minimize Exposure to Flood Hazards Data Analysis: Policy Rankings by Criteria Much More Likely To Meet Criteria Much Less Likely to Meet Criteria Cause and effect drivers from the analysis… Key Insights The Current NFIP has several shortcomings: • Policies that are subsidized or discounted • Low penetration in and out of the flood zone • Inadequate mandatory purchase compliance • Absence of a means-based assistance • Among the "pure" policy options, no one option clearly emerges as the best alternative to the status quo as a long term solution. • Each policy option has a unique mix of strengths and weaknesses. NFIP Modified offers the strongest platform for Reform in the short and medium term • These elements are already influencing current legislative discussions. • However, this option shares shortcomings of the current framework: • Low participation • Less-than full risk rates • Insufficient incentives to mitigate and discourage new development in the floodplain. • Strong elements from each alternative should be incorporated by decision-makers to form a hybrid option. • A hybrid policy serves as an effective vehicle for gradually introducing, testing, and scaling up models that appear promising in the long term without compromising critical program goals in the short term. Reform is Needed 1 No One Policy Option Emerges as “Best” 2 “NFIP Modified” Offers a Strong Platform for Reform 3 Analysis Points to Hybrid Solution 4 NEXT STEPS: PHASE IV STEP 1Learn from Phase III Analysis STEP 3 Integrate Sub-Programs STEP 4 Develop Consensus Recommendation STEP 2 Develop and Optimize Sub-Programs Phase IV Process