NFIP Reform: Phase II Report Table of Contents I.Overview ................................................................................................................................................. 2 Background and Purpose ......................................................................................................................... 2II.Phase II Design ........................................................................................................................................ 3III.Phase II Approach ................................................................................................................................... 3Policy Analysis Framework ....................................................................................................................... 3IV.Phase II Outcomes ................................................................................................................................... 5Step 1: Problem Definition ....................................................................................................................... 5Step 2: Evaluation Criteria ........................................................................................................................ 7V.Next Steps: Phase III ................................................................................................................................ 8VI.Appendix ............................................................................................................................................... 10 I. Overview Background and Purpose In performing its mission, the Federal Emergency Management Agency (FEMA) believes it is important to continually seek input from its many stakeholders on how its programs can be more efficient and effective at meeting the needs of the public. To this end, FEMA has engaged in a comprehensive reform effort to address the concerns of the wide array of stakeholders involved in the ongoing debate about the National Flood Insurance Program (NFIP). The effort is comprised of three phases designed to engage the greatest number of stakeholders and consider the largest breadth of public policy options. Phase I focused on the capture and analysis of stakeholder concerns and recommendations. During the second Phase, FEMA performed additional analysis of existing data and identified a set of evaluation criteria. In Phase III, a portfolio of public policy alternatives will be developed and evaluated using the evaluation criteria, and the resulting recommendations will be reported (see Figure 1 below for a graphical outline of this process). Figure 1. NFIP Reform Process Phase I commenced with the NFIP Listening Session held November 5-6, 2009 in Washington, DC. The goals of this Listening Session were to engage invited stakeholders from Federal, state, local and tribal governments, associations, non-profits and the private sector, to hear about the key issues facing the program, to identify common understanding between groups and to document the diversity of opinions concerning the optimum operation of the NFIP. In addition to the comments received during the Listening Session, FEMA also opened a comment period via the web for the public to submit additional comments for inclusion in the reform effort. Phase II began in March 2010 with the formation of the NFIP Reform Working Group comprised of a cross-section of Federal Insurance and Mitigation Administration (FIMA) Directorate staff. The Working Group was tasked with identifying and analyzing options for the future state of the NFIP. This Phase II effort incorporated the recommendations and themes resulting from the NFIP Listening Session and web comments. In addition, the group comprehensively reviewed prior evaluations of the NFIP including the Call for Issues Status Report (1998-2000), The Evaluation of the National Flood Insurance Program Final Report and other reports conducted by the American Institute for Research (2006) and several reports by the Government Accountability Office (GAO). The approach and outcomes of this phase of the NFIP Reform effort is described in the remainder of this Report. II. Phase II Design The NFIP Phase II Working Group was formed in early March 2010 to design and deliver Phase II of the NFIP Reform effort. The Working Group had eight permanent members from across the three Divisions of the FIMA Directorate. The members brought a wide-range of knowledge and expertise to the Working Group spanning organizational units and experience with the NFIP. Dr. Sandra Knight, Deputy Federal Insurance and Mitigation Administrator, Mitigation, served as the Project Sponsor and Edward Connor, Acting Administrator, Federal Insurance and Mitigation Administration, served as Program Executive. Michael Grimm served as the NFIP Reform Program Manager and led the Working Group. The Working Group met on a weekly basis from March 10, 2010 through May 3, 2010. The weekly meetings were facilitated by Coray Gurnitz Consulting, a public sector organizational consulting firm. The Working Group established several validation points with FIMA, FEMA and Department of Homeland Security (DHS) leadership throughout Phase II. FIMA Directors and Deputy Directors from HQs and Regions contributed directly to the development of the Phase II outputs. Additional input from internal and external stakeholders will be solicited in Phase III. III. Phase II Approach Policy Analysis Framework The Working Group chose a 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. Key aspects of this approach include; systematically applied social science research, attention to values and political aspects, the utilization of multiple research methods, and a future-focused orientation. There are several benefits to the policy analysis framework in the context of public decision-making. First, it reduces uncertainty and provides information for decision makers in the public arena. Second, it provides a systematic evaluation of the full life-cycle of policy reform beginning with the technical, economic and political viability of alternative policies, moving to strategies for implementation, and ending with the consequences of policy adoption. Finally, policy analysis presents a framework for thinking critically about problems and solutions. The basic steps to the NFIP policy analysis, adapted from Basic Methods of Policy Analysis and Planning by Patton and Sawicki, are as follows: Step 1: Define the Problem The foundation for an efficient and effective outcome from the policy process requires a well-defined problem statement. The “problem statement” is a meaningful definition of the problem so that it is amenable to systematic research. When crafting this definition, the analyst must frame the problem situation into a practical, manageable, and actionable framework for analysis, in such a way that eliminates any ambiguity for future references. Step 2: Determine Evaluation Criteria Once the problem has been defined, the next step is to determine evaluation criteria. The criteria are specific statements about the problem that will be used to evaluate alternative policies or programs. Criteria can be weighted to indicate importance (e.g. cost, net benefit, effectiveness/efficiency, equity, ease of implementation, and political acceptability). Step 3: Identify Alternative Policies In Step 3, feasible policy alternatives are developed. Ultimately, alternatives should include policy options already proposed by key political actors, and alternatives that may be superior to those under political discussion. One common alternative is the status quo, suggesting that to do nothing new is a potential option, and allowing the analysis to explore the implications if this were the case. Step 4: Evaluate Alternative Policies In Step 4, each policy alternative is analyzed based on its satisfaction of the evaluation criteria. Additional data is collected to analyze the different levels of influence including the economical, political and social dimensions of the problem. Quantitative and qualitative analyses can be employed to measure the benefits and costs for each alternative, including an analysis of the “unintended consequences” of each policy alternative. Step 5: Distinguish Between Alternative Policies The results of the evaluation of alternatives presents the degree to which criteria are met by each option. In Step 5, the alternative policies are distinguished from each other. In this step of the policy analysis, numerical results combined with expertise are used to decide on a recommended policy. Mixing two or more alternatives is a very common approach in this step of the policy analysis. Step 6: Implement and Monitor the Policy In the final step, the policy implementation is monitored to ensure it is executed as designed. This step helps to assure continuity, and determine whether the policy is having the intended impact. Policy evaluation is critical to ensure the chosen policy alternative remains appropriate and effective. The diagram on the next page depicts the six steps of the policy analysis framework combined with the Working Group timeline for Phases II and III. Diagram 2. Policy Analysis Framework IV. Phase II Outcomes Step 1: Problem Definition The first step in the Policy Analysis framework requires that the problem be well-defined in practical terms to set the basis for the analytical process that follows. In order to complete this step in the process, the Working Group relied on a substantial body of knowledge to augment their existing expertise. The Working Group collected and reviewed a comprehensive library of materials describing the history of the program, the program’s philosophy and the current commentary regarding the NFIP. This background reading helped to set the foundation for the group’s understanding of the program and identify many of the challenges facing the NFIP today. The complete list of materials leveraged during this step can be found in Appendix A. The NFIP Working Group began developing the problem statement by brainstorming a list of words and phrases that characterize the feedback FEMA has received over the NFIP’s programmatic history. Once collected, these words and phrases indicated a need for dissecting the problem statement into elements by stakeholder group. The stakeholder “viewpoints” provided the Working Group with a set of lenses by which to understand the NFIP and the associated policy issues. The stakeholder viewpoints were analyzed in the framework of a logic model. While logic models are not a traditional tool used in policy analysis, the concepts of inputs, throughputs, outputs and outcomes which comprise standard logic models, were critical for understanding the concerns of each stakeholder group. The NFIP Reform Logic Model helped the Working Group to identify the overlaps between stakeholder groups as well as the tensions points that naturally exist between various stakeholders. Ultimately the stakeholder view points and tension points were represented in the following diagram: Diagram 3. Stakeholder Viewpoints Once the stakeholder viewpoints had been fully analyzed, the logic model was expanded to include an initial list of criteria by which each stakeholder group might assess the NFIP. The final stage of the Problem Definition step required the Working Group to document a concise, actionable statement reflecting the policy problem. The following problem statement was developed by the Working Group: NFIP Reform Problem Statement: People in the United States live in risky areas that are vulnerable to natural hazards. Flooding continues to be the number one source of damages from natural hazards in the US. Since NFIP’s inception in 1968, national flood damages continue to increase significantly. Responsibility for flood risk and consequence management is segmented across the Federal, State, and Local governments. Current national flood policy needs to be reconsidered. We are seeking an effective, sustainable way to help people and communities mitigate and recover from disasters. As there is a growing public debate over individual choice and accountability versus social responsibility, we are seizing an opportunity to reshape our National policies. The problem statement above will be used throughout Phase III to solicit input from internal and external stakeholders regarding the challenges facing the NFIP. Step 2: Evaluation Criteria The next step in the Policy Analysis Framework requires the establishment of evaluation criteria. As described above, these criteria define the dimensions of the problem as stated in the problem statement. 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 Working Group began the development of evaluation criteria by reviewing the stakeholder viewpoints captured in the logic model. The Working Group identified several requirements shared across multiple stakeholder groups. These commonalities were documented as a set of guiding principles; concepts that could be agreed upon by the majority of NFIP stakeholders and serve as the foundation for any proposed policy solution. The NFIP Reform Guiding Principles are provided below: • Protect lives, property, environmental and cultural assets • Motivate people to voluntarily participate in reducing society's risk • Make the best use of public resources • Ensure selection of an adoptable and sustainable policy • Consider notions of equity with regard to risk and socioeconomic status • Recognize and consider the governance and responsibility of states, communities and tribes as a means to achieve sustainability and resiliency The guiding principles serve as a necessary, but not sufficient set of criteria for evaluating proposed policies as they do not possess a directional nature. The Working Group utilized the guiding principles to develop a list of evaluation criteria. For each criterion, the Working Group identified an associated spectrum of values. For a sub-set of the criteria it was clear which end of the spectrum would be preferred. For others, the Working Group collected input from FIMA and FEMA leadership to understand their preferred direction. See Appendix B for a copy of the evaluation criteria worksheet. The results of this analysis were aggregated and incorporated as the final set of evaluation criteria. • Cost of flood is borne by individuals • Individuals incur costs of increased risk gradually • Assistance is provided to those who cannot afford the cost of flood • Minimize exposure to flood hazards • Maximize natural and beneficial functions of the floodplain • Efficiency - Maximize the societal benefit/cost ratio • Administrative feasibility • Political acceptability The final task in Step 2 was to begin weighting the evaluation criteria to reflect their relative priority. The Working Group selected a pair-wise comparison method to allow 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. During Phase II the Working Group collected data from the FIMA Headquarters and Regional Leadership Team. A copy of the pair-wise comparison worksheet used in this step can be found in Appendix C. The results of this exercise, are presented below: Table 1. Phase II Pair-wise Comparison Results As indicated in the table above, the Working Group will continue to collect weighting data via pair-wise comparison throughout Phase III to ensure representation by a varied stakeholder base. The weights will be used as multipliers when evaluating the proposed policy alternatives in Phase III. V. Next Steps: Phase III Following the validation of Phase II outcomes by DHS, FEMA and FIMA leadership, the NFIP Reform effort progressed into Phase III. The Working Group participated in a two-day off-site event to design the approach for Phase III in June, 2010. This design for this phase of the effort includes three steps; 1) Develop reform packages, 2) perform analysis and 3) vet results and prepare legislation and regulations. The first step (Develop Reform Packages) aligns with Step 3 in the Policy Analysis Framework. During this step the Working Group will identify and develop the set of policy alternatives that will be considered in the reform effort. During Step 2 (Analysis), the Working Group will evaluate the proposed policy alternatives and score them using the evaluation criteria and weighting described above. The policy alternative with the highest score, or a combination of high-scoring elements from several of the alternatives, will become the recommended NFIP Reform policy. This recommendation will be further developed into a full reform package including proposed legislative, regulatory and administrative changes during Step 3. This final package will be submitted to FIMA, FEMA and DHS leadership as the final deliverable of the NFIP Reform Working Group. During the off-site the following timeline was created and later validated with Agency leadership. Diagram 4. Phase III High-Level Timeline: 18-month View (as of June 2010) A critical element for Phase III will be the Stakeholder Engagement effort. The Working Group is in the process of conducting a Stakeholder Analysis to assess the requirements of the NFIP Reform stakeholders and identify key sources of input. Throughout Phase III the Working Group will reach out to the identified stakeholders to ensure the NFIP Reform effort incorporates the opinions of its diverse stakeholder base and ultimately succeeds in recommending a policy that addresses the concerns of the nation. VI. Appendix Appendix A: NFIP Reform Background Materials List Appendix B: NFIP Reform Evaluation Criteria Worksheet Appendix C: NFIP Reform Pair-wise Comparison Worksheet Document Author Year FEMA NFIP Financial Stabilization Project Deloitte & Touche 2000 IIABA Recommended Improvements to the NFIP Independent Insurance Agents and Brokers of America (IIABA) 2010 The Evaluation of the NFIP - Final Report American Institutes for Research (AIR) (on behalf of FEMA) 2006 The Evaluation of the NFIP - Final Report - Recommendations from the Individual Reports AIR (on behalf of FEMA) 2006 The Evaluation of the NFIP - Performance Assessment and Evaluation Measures for Periodic Use by NFIP AIR (on behalf of FEMA) 2006 Summary of GAO Recommendations FEMA (based on GAO Reports) current GAO Report 09-271 (High Risk Series) US Government Accountability Office (US GAO) 2009 Synopsis of Insurance and Other Programs of Financial Assistance to Flood Victims Report STARR (requested by FEMA) 2009 GAO Report 09-420R (Proposed Changes to NFIP) US GAO 2009 GAO Report 09-20 (Options for Addressing the Financial Impact of Subsidized Premium Rates on the NFIP US GAO 2009 The NFIP's Market Penetration Rate (Executive Summary) RAND Corporation (for FEMA) 2006 Insurance and Other Programs for Financial Assistance to Flood Victims US Department of Housing and Urban Development (HUD) 1966 The NFIP Outside the Box Gilbert F. White National Flood Policy Forum (Mike Buckley) 2010 A Matrix of Options to Provide Rate Relief for Structures Newly Mapped into the SFHA FEMA 2010 Mexico is Offering Bonds to Cover a Major Quake New York Times 2006 Encouraging Adaptation to Climate Change: Long Term Flood Insurance Resources for the Future (Howard Kunreuther and Erwann Michel- Kerjan) 2009 Listening Session Web Comments FEMA 2010 CRS Report - Background Challenges Financial Status Congressional Research Service (CRS) 2009 CRS Report - Side-by-Side Comparison of Flood Insurance Reform Legislation in the 110th Congress CRS 2008 CRS Report - Mandatory Flood Insurance Purchase in Remapped Residual Risk Areas Behind Levees CRS 2010 CRS Report - Midwest Flooding Disaster: Rethinking Federal Flood Insurance? CRS 2008 CRS Report - Federal Flood Policy Challenges: Lessons from the 2008 Midwest Flood CRS 2008 WMO Report - Economic Aspects of Integrated Flood Management World Meteorological Organization /Associated Programme on Flood Management (APFM) 2007 Document Author Year Reforming the National Flood Insurance Program Resources for the Future (Carolyn Kousky) 2010 How the NFIP, Insurance Law and Climate Change Could Cause the Perfect Storm Andrew K. Gordon and Jess R. Booth 2009 FEMA's New Flood Maps Go Too Far Some Cities Say Lynn Thompson, Seattle Times 2010 Value of Properties in the NFIP Congressional Budget Office (CBO) 2007 Effects of Disclosure of Flood Liability on Residential Property Values Stephen Yeo Risk Frontiers-NHRC Macquarie University Testimony from J. Robert Hunter, before the Senate Committee on Banking, Housing and Urban Affairs J. Robert Hunter, Director of Insurance for the Consumer Federation of America 2005 Phase 1 Report FEMA current GAO Report 07-285 (Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades are Potentially Significant) US GAO 2007 Can Security Markets Save the Private Catastrophe Insurance Market? Jaffee and Russell 1998 Reducing Hurricane and Flood Losses through Insurance and Mitigation (Wharton Research for FEMA on Insurance and Mitigation) The Wharton School of the University of Pennsylvania (for FEMA) 2010 An Estimate of the U.S. Population Living in 100-Year Coastal Flood Hazard Areas Journal of Coastal Research 2010 FEMA’s Coastal Population Study: Comments on Data Accuracy, Current Initiatives, and Future Risk Journal of Coastal Research 2010 Myths and Facts about the National Flood Insurance Program FEMA 2010 National Disaster Fund - Catastrophe Funds http://www.protectingamerica.org/; Obama (Op-Ed) 2010 Fleecing of America Story - Very Sloppy Journalism Dale Lehman 2010 Reducing Flood Losses: Is the 1% Chance (100-year) Flood Standard Sufficient? Gilbert F. White National Flood Policy Forum 2004 Market Failure in Information: The National Flood Insurance Program James Chivers and Nicolas E. Flores 2002 Guarding People and Property Against Natural Hazards U.S. Commission on Ocean Policy 2004 The Role of Insurance and Regulation in Reducing Losses from Hurricanes and Other Natural Hazards Howard Kunreuther 1995 Disasters and Public Policy: Can Market Lessons Help Address Government Failures? Erwann O. Michel-Kerjan The Wharton School of the University of Pennsylvania 2007 Policy Analysis for Natural Hazards: Some Cautionary Lessons from Environmental Policy Analysis Matthew D. Adler The Wharton School of the University of Pennsylvania 2006 Document Author Year Impacts of Insurance Status on Economic Welfare of Homeowners in Hazard Prone Areas: The Affordability Challenge Ch. 11 from "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes" 1999 Policy Analysis of Alternative Programs: Comparing the Status Quo with A true Competitive Insurance Market Ch. 13 from "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes" 1999 Equity Analysis and Natural Hazards Policy Matthew D. Adler, University of Pennsylvania 2005 Ecosystem Goods and Services: Definition, Valuation and Provision Thomas C. Brown, USFS; John C. Bergstrom, University of Georgia; John B. Loomis, Colorado State University 2006 The Impacts of Natural Disasters: A Framework for Loss Estimation (Executive Summary) National Research Council 1999 Challenges Facing the Insurance Industry in Managing Catastrophic Risks Paul Kleindorfer, Howard Kunreuther 1999 The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks Paul Kleindorfer, Howard Kunreuther 1997 Regulation and Markets for Catastrophe Insurance Paul R. Kleindorfer and Robert W. Klein No Matter What, We Pay for Others’ Bad Habits Sandeep Jauhar, M.D. NY Times 2010 Strategies for Better Protection against Catastrophic Risks Howard Kunreuther, Robert Meyer and Erwann Michel-Kerjan The Wharton School of the University of Pennsylvania 2007 A Very Clear Blue Line: Behavioral Economics, Public Choice, Public Art and Sea Level Rise Marc Poirier 2007- 2008 Assessing Hurricane and Flood Risks and Reduced Losses from Mitigation Measures Howard Kunreuther and Erwann Michel-Kerjan 2009 Flooding the Market: The Distributional Consequences of the NFIP J. Scott Holladay Jason A Schwartz 2010 Can property insurance companies in hurricane-prone areas sustain their operations? Dr. Robert W. Klein Wharton Risk Management and Decision Processes Center of the University of Pennsylvania 2010 FIFM-TF Listening Session Summary Report Federal Interagency Floodplain Management Task Force 2010 NFIP Financial Stabilization Project (2008 Update) Deloitte Consulting 2009 Committee Testimony - National Flood Insurance House Financial Services Committee — Subcommittee on Housing and Community Opportunity 2010 Huge Losses Put Federal Flood Insurance Plan in the Red Thomas Frank, USA Today 2010 NFIP Reform Evaluation Criteria Allocation of Cost Criteria 1. Who pays for those vulnerable to flood risk? 2. How quickly should individuals incur the cost of increased risk? 3. To what extent should the public assist to make the cost of flood affordable? Program Effectiveness Criteria 4. To what extent should the policy limit individual choice on land use and building practices? 5. Minimize exposure to flood hazards. 6. Maximize natural and beneficial functions of the flood plain. Additional Criteria 7. Efficiency - Maximize the societal benefit/cost ratio 8. Administrative feasibility 9. Political acceptability NFIP Reform Pair-wise Comparison Instructions: 1) Review the pair of criteria in each row on the "Pair-wise Comparison" tab. 2) Decide which of the criteria in the pair is more important to you. Input an A or B in the "More Important" column to indicate your preference. 3) Select the intensity with which you prefer your chosen criterion based on the scale below. Indicate your response in the "Intensity" column. Pair-wise Comparison: Criteria More Important Intensity A B Cost of flood is borne by individuals. Individuals incur costs of increased risk gradually. Cost of flood is borne by individuals. Full assistance is provided to those who cannot afford the cost of flood. Cost of flood is borne by individuals. Minimize exposure to flood hazards. Cost of flood is borne by individuals. Maximize natural and beneficial functions of the floodplain. Cost of flood is borne by individuals. Efficiency - Maximize the societal benefit/cost ratio. Cost of flood is borne by individuals. Administrative feasibility Criteria More Important Intensity A B Cost of flood is borne by individuals. Political acceptability Individuals incur costs of increased risk gradually. Full assistance is provided to those who cannot afford the cost of flood. Individuals incur costs of increased risk gradually. Minimize exposure to flood hazards. Individuals incur costs of increased risk gradually. Maximize natural and beneficial functions of the floodplain. Individuals incur costs of increased risk gradually. Efficiency - Maximize the societal benefit/cost ratio. Individuals incur costs of increased risk gradually. Administrative feasibility Individuals incur costs of increased risk gradually. Political acceptability Full assistance is provided to those who cannot afford the cost of flood. Minimize exposure to flood hazards. Full assistance is provided to those who cannot afford the cost of flood. Maximize natural and beneficial functions of the floodplain. Full assistance is provided to those who cannot afford the cost of flood. Efficiency - Maximize the societal benefit/cost ratio. Full assistance is provided to those who cannot afford the cost of flood. Administrative feasibility Full assistance is provided to those who cannot afford the cost of flood. Political acceptability Minimize exposure to flood hazards. Maximize natural and beneficial functions of the floodplain. Minimize exposure to flood hazards. Efficiency - Maximize the societal benefit/cost ratio. Minimize exposure to flood hazards. Administrative feasibility Minimize exposure to flood hazards. Political acceptability Maximize natural and beneficial functions of the floodplain. Efficiency - Maximize the societal benefit/cost ratio. Criteria More Important Intensity A B Maximize natural and beneficial functions of the floodplain. Administrative feasibility Maximize natural and beneficial functions of the floodplain. Political acceptability Efficiency - Maximize the societal benefit/cost ratio. Administrative feasibility Efficiency - Maximize the societal benefit/cost ratio. Political acceptability Administrative feasibility Political acceptability