Committee on the Affordability of National 

Flood Insurance Program Premiums

Water Science and Technology Board

Board on Mathematical Sciences and Their Applications

Committee on National Statistics

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FACI Meeting

May 26, 2016
Study Origins: Congressionally Mandated

WATER SCIENCE AND TECHNOLOGY BOARD

Source: FEMA News Photo

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• Section 100236. Study of participation 

and affordability for certain 

policyholders

• (a) FEMA study

• (b) NAS economic analysis 

Biggert-Waters 2012

• Section 16. Affordability study and 

report

• (b) Timing

• (c) Funding

Homeowner Flood Insurance 

Affordability Act 2014 (HFIAA 2014)
WATER SCIENCE AND TECHNOLOGY BOARD

Report 1 and 2 Task Statement

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Provide advice on how 

to analyze, but does not 

analyze, different 

affordability policy 

options

Provide advice on 

how to develop an 

affordability 

framework, but does 

not design a 

framework
Committee Members and Staff

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MEMBERS

LEONARD A. SHABMAN, Chair, Resources for the Future, Washington, D.C.

SUDIPTO BANERJEE, University of California, Los Angeles 

JOHN J. BOLAND, Johns Hopkins University, Baltimore, Maryland PRESENT 

PATRICK L. BROCKETT, University of Texas, Austin 

RAYMOND J. BURBY, University of North Carolina, Chapel Hill

SCOTT EDELMAN, AECOM, Greensboro, North Carolina

W. MICHAEL HANEMANN, Arizona State University, Tempe

CAROLYN KOUSKY, Resources for the Future, Washington, D.C. PRESENT 

HOWARD C. KUNREUTHER, University of Pennsylvania, Philadelphia PRESENT 

SHIRLEY LASKA, University of New Orleans, New Orleans, Louisiana

DAVID R. MAIDMENT, University of Texas, Austin

DAVID MAURSTAD, OST, Inc., Washington, D.C. 

ALLEN L. SCHIRM, Mathematica Policy Research, Washington, D.C. PRESENT

STAFF

JEFF JACOBS, Past Director, Water Science and Technology Board

ED J. DUNNE, Staff Officer, Water Science and Technology Board PRESENT

CONSTANCE F. CITRO, Senior Board Director, Committee on National Statistics

SCOTT T. WEIDMAN, Director, Board on Mathematical Sciences and Their Applications

ANITA A. HALL, Senior Program Associate, Water Science and Technology Board
WATER SCIENCE AND TECHNOLOGY BOARD

Two Report Series 

Report 1

Released in March 2015

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2. History of the NFIP

3. Pricing and practices

4. Demand for flood insurance

5. Location of Affordability Challenges

6. Framework for Assistance Program 

Design 

7. Policy options for: 

– targeted assistance like loans and vouchers

– making premiums less expensive for all 

policyholders

2. Policy evaluation

3. Data for analysis of policy 

options

4. Analytical next steps and 

further thoughts 

Report 2

Released in December 2015
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Basic Overview of NFIP

• About 5.1 million policies nationwide representing $1.25 trillion in 

coverage.

• Almost 40% of all policies are in Florida and 60% are located are in 

Florida, Texas, and Louisiana.

• Estimates suggest take-up rates in SFHA may average 50% with 

high regional variation. Take-up outside SFHA is much lower.

• More than 1 million policyholders—about 19%—are paying preFIRM rates.

• The number of grandfathered policies are unknown.

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Multiple Objectives of NFIP

Report 1, Chapter 2

• Objectives are not always compatible, and at times may conflict with 

one another

• BW 2012 increased the emphasis on setting NFIP rates that reflected 

flood risk, and charging premiums to cover claims & expenses

Hazard 

mitigation

High take 

up rates

Financial 

soundness

Awareness 

of flood 

risk

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Pricing, Policies, Premiums

Report 1, Chapter 3

• NFIP has historically tried to achieve multiple objectives through 

pricing. Program is also subject to constraints that a private company 

would not be (e.g. cannot refuse coverage).

• Affordability has been an implicit part of pricing:

– Pre-FIRM discounts

– Grandfathering

Changes in policy pricing in BW 2012 and HFIAA:

• BW 2012 sought to charge all properties NFIP risk-based rates (i.e., 

phasing out of pre-FIRM subsidies and elimination of grandfathering)

• HFIAA 2014 slowed phase-in of full risk rates and reinstated 

grandfathering.

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The Insurance Purchase Decision

Report 1, Chapter 4

• Household decisions to purchase insurance can be evaluated 

through different models of choice. No single model will fully 

explain household behavior.

• Premium prices may affect take up rates; however, the strength of 

that effect is limited. The effect that available disaster aid has on 

that decision is uncertain. Lower premiums alone may not 

significantly increase take up rates.

• Studies show that individuals may employ intuitive thinking (vs. 

systematic consideration of cost vs. future claims) when choosing 

to forego insurance.

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Nature of Intuitive Thinking

• Exhibit systematic biases

– (e.g. estimate likelihood of an event by its salience)

• Use simplified decision rules 

– (e.g. likelihood of disaster is below my threshold level of 

concern)

• Myopic behavior 

– (e.g. desire for immediate returns on insurance)

• View insurance as an investment not a protective 

measure.

WATER SCIENCE AND TECHNOLOGY BOARD

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Impact of Intuitive Thinking on Insurance 

Decisions 

• Individuals voluntarily purchase insurance after a disaster 

rather than prior to the event and cancel their policy several 

years later if they have not suffered losses

• Do not invest in protective measures because of myopic 

thinking

• Flood related damage is not high on their list of concerns

• Affordability issues exacerbate the situation

• Difficult to convince individuals that the best return on 

investing in protection is NO RETURN AT ALL

WATER SCIENCE AND TECHNOLOGY BOARD

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Defining Affordability

Report 1, Chapters 6 and 7

• There are no objective definitions of affordability

• The choice of definition can be informed by research and 

experience in administering means-tested programs

• There are many ways to measure the cost burden of 

flood insurance on property owners and renters

• Policymakers will have to determine how to assess 

whether premiums are cost burdensome.

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Possible Affordability Assistance Programs 

Report 1, Chapters 6 and 7

Assistance to cost burdened policyholders

o Prioritizing existing mitigation grants

o Providing loans based on targeting criteria

o Providing vouchers based on targeting criteria.

Across-the-board initiatives

o Expanding the range of mitigation measures that can 

reduce premiums

o Encouraging higher deductibles

o Expanding the role of insurance agents in educating 

policyholders 

o Relying on Treasury to help pay claims in catastrophic loss 

years.

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Design Decisions

•Cost burdened

•Loss of pre-FIRM subsidy/grandfathering

•Requirement to purchase flood insurance

Who will receive 

assistance

•Premium payment assistance

•Mitigation cost assistance

•Both

What assistance will 

be provided

•Vouchers

•Mitigation loans and grants

•Tax credits and deductions

How will assistance be 

provided

•Formula for calculating amounts

•Setting minimum and maximum amounts

•Duration of assistance

How much assistance 

will be provided

•Allocate between taxpayers and policy holders who do not 

receive assistance

Who will pay for 

assistance

•Specify the entities responsible for eligibility and 

assistance award determinations

How will assistance be 

administered

Policy Options

Affordability Assistance

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WATER SCIENCE AND TECHNOLOGY BOARD

Two Report Series 

Report 1

Released in March 2015

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2. History of the NFIP

3. Pricing and practices

4. Demand for flood insurance

5. Location of Affordability Challenges

6. Framework for Assistance Program 

Design 

7. Policy options for: 

– targeted assistance like loans and vouchers

– making premiums less expensive for all 

policyholders

2. Policy evaluation

3. Data for analysis of policy 

options

4. Analytical next steps and 

further thoughts 

Report 2

Released in December 2015
WATER SCIENCE AND TECHNOLOGY BOARD

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NFIP Pricing

• Grandfathering will 

perpetuate cross-subsidies.

• NFIP Risk-Based Premiums: 

Implementing BW 2012 will 

not result in NFIP risk-based 

premiums for properties 

outside SFHA.

The Insurance Purchase 

Decision

• Promoting Takeup: Aid may 

need to be extended to property 

owners who are not required to 

purchase flood insurance.

• Information Dissemination: 

Informing policyholders of the 

NFIP risk-based rate may help 

provide accurate information on 

flood risk.

Findings related to Report 1

Report 2, Chapter 4
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Content

Elements of a 

planning 

process

Model 

development 

for evaluating 

options

Microsimulation 

modelling

Pilot Analysis

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An Approach to Policy Evaluation 

Report 2, Chapter 2

Report available at: 

http://dels.nas.edu/resources/static-assets/wstb/miscellaneous/wstb-cp.pdf
WATER SCIENCE AND TECHNOLOGY BOARD

What’s in a name?

• “Micro” – Micro data on 

decision making units

• “Simulation” – Policy 

changes are simulated, 

not implemented

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Microsimulation

Report 2, Chapter 2

Compare alternative options

Conduct simulations

Formulate alternative options

Specify baseline

Identify policy relevant questions 
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Microsimulation

Advantages

• At the right level

• Provides 

framework

• Analytically 

flexible

• Developmentally 

flexible

Challenges

• Complexity

• Time and 

Resources
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Data gaps

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Biggest Challenge for Policy Evaluation
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The NFIP Policy 

Holder

• Location of property

• Coverage

• Current premium

• First floor elevation

• Socioeconomic 

characteristics 

• Response to price

• Grandfathered?

Property without 

Insurance 

• Location of property

• First floor elevation

• Socioeconomic 

characteristics

• Potential premium

• Response to price 

Flood Insurance 

Risk

• Probability of 

flooding

• Base flood 

elevation

• Stage damage 

curves

Filling data gaps

• Census/American 

Community Survey

• Federal Agency 

Admin. Records

• Tax assessment 

records

• LiDAR

• Proxy variables

• Sample survey

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Data for Analyses of Policy Options 

Report 2, Chapter 3
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Near-Term Analyses for 

Affordability Policy Options 

Report 2, Chapter 4

Some questions can be 

answered in a qualitative way.

Some options might be initially 

removed as candidates.

Some analyses can be 

completed with available data.

Additional analyses can be completed 

with limited investments in obtaining 

new data.
WATER SCIENCE AND TECHNOLOGY BOARD

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Bottom Line—Both Reports

Report 1

• Policymakers will have to 

determine how to define 

affordability and assess 

whether premiums are 

cost burdensome.

• Providing targeted 

assistance requires 

policy judgements 

involving tradeoffs.

Report 2

• FEMA’s capacity to 

evaluate policy options, 

including but not limited 

to affordability, is 

currently limited.

• But, analytical capacity 

can be advanced 

substantially through 

time.
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For further information, please contact the Water Science and Technology Board

http://dels.nas.edu/wstb

Thank you

For free download of the committee’s report and 

others, please visit National Academies Press 

http://www.nap.edu/