Flood insuranceCommunity-based flood insurance offers benefits, faces challenges

Published 30 July 2015

Community-based flood insurance — a single insurance policy that in theory would cover an entire community — may create new opportunities to reduce flood losses and enhance the likelihood of communities paying more attention to flood risk mitigation, says a new National Academies report. This option for providing flood insurance, however, would not provide the sole solution for all of the nation’s flood insurance challenges.

Community-based flood insurance — a single insurance policy that in theory would cover an entire community — may create new opportunities to reduce flood losses and enhance the likelihood of communities paying more attention to flood risk mitigation, says a new report from the National Academies of Sciences, Engineering, and Medicine. This option for providing flood insurance, however, would not provide the sole solution for all of the nation’s flood insurance challenges.

Communities already play substantial roles in flood risk management, for example through implementing land-use decisions, building codes, and evacuation plans. Many communities also participate in the Community Rating System, a voluntary program within the National Flood Insurance Program (NFIP), which offers discounts on premiums to policyholders in communities that undertake actions such as public information and outreach, mapping and regulations, flood damage reduction, and warning and response.

NSA notes that although it has yet to be implemented, the policy option of community-based flood insurance could increase coverage purchase rates, promote mitigation and floodplain management strategies that reduce risk to individual properties, reduce premiums, and cut down on NFIP administrative costs by issuing collective policies rather than individual ones.

However, the prospects for community-based flood insurance may be compromised if communities are unwilling to participate, have limited administrative capabilities to implement a program, or lack authority to regulate land use and collect revenue, the report notes. Variations in the size of the population and geographical area that communities represent may also pose challenges.

FEMA defines a community as a “political entity that has the authority to adopt and enforce floodplain ordinances for the area under its jurisdiction.” Although a city or town would qualify, it is unclear whether the definition could be extended to a neighborhood, a gated community, or a business district. More explicit definitions will be needed if community-based flood insurance is implemented, the report says.

Any future community-based flood insurance program must also consider who bears the risk; who writes the policy and determines coverage limits and standards; how premium costs are underwritten, priced, and allocated; who accepts the administrative capabilities; how compliance with any mandatory purchase requirements is ensured; and how pricing expertise is used in setting risk-based premiums.

The report points to an economic principle that says if the collective interests of communities and individual residents fully align and are accounted for, then the outcomes will be the same regardless of which group bears responsibility for insurance.  In practice, however, there are several reasons why this may fail to hold, including when some or all residents “free-ride” and do not buy insurance because they expect post-disaster relief.

The report lists eight such reasons that, depending on the underlying circumstances in a community, can help guide decisions about when community-based flood insurance may be more or less preferable than insuring at the individual level.

The study was sponsored by the Federal Emergency Management Agency.

— Red more in A Community-Based Flood Insurance Option (National Academies Press, 2015)