Tying Flood Insurance to Flood Risk for Low-Lying Structures in the Floodplains

National Research Council

[From Press Release]  Current methods used by the National Flood Insurance Program for setting risk-based insurance rates do not fully capture the flood risk for low-lying structures, which are more likely to incur losses because they are subject to longer duration and greater depth of flooding and are flooded more frequently and by smaller flood events, says a newreport from the National Research Council.  The report offers alternative approaches for calculating risk-based premiums for these structures, ranging from incremental changes to current methods to a complete overhaul of the system, although it does not recommend which approach the NFIP should adopt or what the new rates should be.

NFIP currently assesses flood risk in terms of the probability and depth of flooding, the economic value of the assets subject to damage, the vulnerability of the structure, and the performance of flood protection and mitigation measures. This information is combined to calculate the average annual loss, which is then converted into insurance rates for classes of structures that share similar characteristics.

However, structures that existed in low-lying areas before floodplain maps became available receive subsidized rates that do not reflect the actual risk of flooding, and therefore have lower premiums.  The Biggert-Waters Flood Insurance Reform Act of 2012 and subsequent legislation require these subsidies to be phased out, which will result in substantial premium increases for nearly 1 million of the 5.5 million NFIP policies nationwide.  In particular, these rate hikes will affect “negatively elevated” structures, whose lowest floor, including the basement, lies below the NFIP benchmark for construction standards and floodplain management.

The report offers seven possible incremental changes to current methods to more accurately determine risk-based rates for these structures:

  • Use information from existing detailed flood studies to better define the water surface elevations for frequent floods;
  • Calculate the average annual loss component of the flood insurance rate using local rather than national flood hazard data;
  • Research which drivers of flood damage beyond inundation depth, such as flood duration, water contamination, and debris content, are most important and develop an appropriate damage prediction function for calculating rates;
  • Build a large set of flood damage reports from relevant agencies and use it to adjust damage estimates annually;
  • Assess the ability of levees to prevent inundation of negatively elevated structures by frequent events;
  • Discourage deliberate underinsurance and compensate for it, for example, by tying the underinsurance adjustment to the replacement cost of the structure, reducing loss payments or imposing penalties for severely underinsured structures;
  • Adjust deductible discounts or increase minimum deductibles to reduce high risk-based premiums…

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