Flood

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BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• funding for NFIP including mechanisms & concerns about sustainability
• Biggert-Waters flood insurance reform act of 2012

The Horn & Brown reading on the National Flood Insurance Program (NFIP) was new to the syllabus for 2018.Fall. It is dated September 12, 2017. The previous NFIP reading was dated February 6, 2013 and although many components of NFIP are unchanged, the reading is organized differently. (It isn't just a minor update.) Many of the exam questions from the old reading are still relevant, however. Questions in the BattleTable that are not relevant anymore are highlighted in tan.

reference	part (a)	part (b)	part (c)	part (d)
E (2017.Fall #8)	funding: - concerns regarding NFIP	participation rate: - why it's low for NFIP	participation rate: - how to increase	wind coverage under NFIP: - arguments for & against
E (2017.Spring#8)	risk transfer process: - crop & flood insurance1	risk transfer process: - criticisms
E (2016.Fall #9)	NFIP challeneges: - sustainability, assessment	flood plain development: - ways to reduce
E (2016.Spring#9)	uninsurability: - of flood risk	functions: - NFIP	Biggert-Waters: - provisions
E (2015.Fall #8)	funding: - NFIP	Biggert-Waters: - NFIP premium subsidies	Biggert-Waters: - NFIP participation rate
E (2015.Spring#9)	see Germani.GovtIns - [Hint: FCC(ES)]	statutory mandate: - NFIP	moral hazard: - impact on NFIP	adverse selection: - impact on NFIP
E (2014.Fall #9)	funding: - NFIPN	funding: - social security	funding: - shortfall for NFIP
E (2013.Fall #13)	ratemaking principles: - satisfied by NFIP?	improvements: - to NFIP

¹ See Germani.GovtIns for the crop insurance part of this question.

^N Part (a.i) on social security is no longer on the syllabus.

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In Plain English!

Intro

Alice says don't bother reading the Summary from the Horn reading. (And no, she isn't using reverse psychology!) The summary is confusing. I've outlined below what it covers. The remainder of this wiki article then provides details for the items mentioned in the summary. I just used common sense along with old exam problems to predict likely future questions. The point is not to acquire a comprehensive knowledge of NFIP. The point is to memorize as few key facts as possible to be able to answer likely exam questions. Cynical, I know, but that's our Alice! She wants you to minimize study time and maximize life enjoyment.

Keep in mind that the flood reading is ranked in the #13-18 range in terms of points-per-exam on recent exams. Use this fact to assess the level of detail required. (If this were a Top 6 reading, you would definitely have to learn more details than what I've presented below.)

paragraph #	topic	specific questions
1	general info	- purpose of NFIP (flood insurance & mitigation) [Hint: AM&R] - participation in NFIP is voluntary
2	flood maps	- FEMA makes FIRMs (FIRMs = Flood Insurance Risk Maps) - FIRMs identify SFHAs (SFHAs = Special Flood Hazard Areas)
3	policies	- 3 types of SFIPs (Standard Flood Insurance Policies) - property owners in SFHAs must buy flood insurance - property owners in moderate risk areas may buy PRPs (Preferred Risk Policies) that are cheaper
4	premiums	- should reflect true costs but some subsidies are available
5	suspension from NFIP	- probation or suspension from NFIP makes it hard to get disaster relief
6	NFIP funding	- funded by congressional appropriations and premiums - NFIP owes treasury $25b (serviced by NFIP, not taxpayers) - repayment schedule is uncertain (NFIP may not be sustainable)

Paragraph 1 (General Info)

Alice the Actuary has a friend named Diego the Dutiful. He knows he should probably buy flood insurance but is clueless on how the program works. Alice loves talking insurance and is only too happy to teach him using the Socratic Method.

Question: what is the purpose of NFIP [Hint: AM&R] (see top of page 2 in Horn & Brown reading)

Access: provide access to primary insurance (transfers some of the financial risk to the federal government)

Mitgate & Reduce: mitigate & reduce flood risk through floodplain management standards (these standards are discussed further down)

Question: is participation in NFIP voluntary or mandatory

• participation is voluntary (of course if participation is voluntary, there is risk of adverse selection – only people living in a floodplain would participate but then cost-based rates would be unaffordable)

Question: describe the required condition for communities/regions to participate in NFIP

• The Federal Emergency Management Agency, or FEMA, is allowed to provide flood insurance only to regions that adopt and enforce adequate land use and control measures.
• This is done through local or state laws for minimum floodplain management standards as described in FEMA regulations

Paragraph 2 (Flood Maps)

Diego's husband likes fresh eggs so they keep chickens on their rural property. Their chicken coop was near the river and earlier this year, it was washed away in a flash flood. Diego asks Alice if he should rebuild it on stilts to protect it from future flooding. Alice's response: "Forget the stilts - just build it far away from the river!"

Question: how does NFIP reduce flood risk (page 2)

NFIP requires participating communities to:

• create FIRMs (communities collaborate with FEMA to create & adopt Flood Insurance Rate Maps)
• enact minimum floodplain management standards based on these maps

Question: identify specific intentions of the minimum floodplain management standards [Hint: restrict-guide-reduce] (page 6)

restrict development on flood-prone land

guide development away from flood-prone land

reduce damage caused by floods

Question: identify KEY CONDITIONS of the minimum floodplain management standards

There are many answers:

• require permits for development in the SFHA (Special Flood Hazard Area)
• lowest floor of SFHA buildings must be above a minimum height
• restrict development in floodways

A Special Flood Hazard Area, or SFHA, is an area, according to FIRMs, that has greater than 1% chance of flooding in any given year. This is also referred to as a 1-in-100 year flood.

Question: what happens if FEMA discovers that a participating community is not in compliance with floodplain management standards

• the community may be placed on probation or suspended from the program completely (this is discussed further down)

Paragraph 3 (Policies)

NFIP offers 3 different SFIPs (Standard Flood Insurance Policies). The 3 policies are Dwelling, General Property, and Residential Condos, but I doubt you have memorize that. Page 8 of the Horn & Brown reading also has a table showing NFIP coverage limits. Obviously you don't have to memorize coverage limits, but this may relate to another potential exam question:

Question: given the existence of NFIP, what role does the private market play in flood insurance

• private market can provide excess coverage (higher limits)
• private market can provide broader coverage (may cover NFIP exclusions like alternate living expenses and/or business interruption)

If you own a property in a SFHA and you want a federally-backed mortgage then you must buy flood insurance. The lending agency is just protecting their investment. Conversely, if you own a property outside a SFHA, you don't have to have flood insurance. If such a property owner does buy flood insurance, they may buy a lower-cost PRP (Preferred Risk Policy).

Question: even though flood insurance is optional for property owners outside a SFHA, why does FEMA still encourage purchase of PRPs for such property owners

This is like DUH. There are 2 reasons:

• even outside of a SFHA, there is still a risk (maybe it's 1-in-50 year, or 1-in-25 year) but FEMA is still totes concerned about you :-)
• if low or moderate risk insureds purchase insurance, this spreads the risk over a large group ==> increases availability & affordability (this is the whole point of insurance - spread the risk!!!)

Question: what is the relationship between FEMA and private companies within the NFIP framework (Page 12)

FEMA provides management & oversight. Private companies handle day-to-day operations (marketing, sales, claims management.)

Question: describe the 2 specific servicing arrangements available to private companies within the NFIP framework

Direct Serving Agent (DSA):

- private contractor for FEMA

- facilitates purchase of flood insurance directly from NFIP

Write-Your-Own program (WYO):

- private companies directly write and service policies themselves

- the majority of NFIP policies are currently written through WYO

Note that for both types of servicing arrangements, NFIP retains the financial risk. Also, policy terms & premiums are the same through DSA & WYO. Sweet deal! It works the same way in crop insurance - remember Alice's cousin, Fanny the Farmer?

Paragraph 4 (Premiums)

Alice tells me that the premium rate structure for NFIP is beyond the scope of the reading. There are just a couple of things you might need to know from pages 14-20.

Question: briefly describe the degree of cross-subsidization in premium rates for NFIP

• The rates are supposed to be based on the risk. In other words, low-risk policyholders are not supposed to subsidize high-risk customers. (Certain subsidies are available, however.)

Question: if NFIP premium rates are based on risk (with minimal cross-subsidization), won't rates for high-risk customers be unaffordable?

• Rates for high-risk customers will be higher, but a core design feature of NFIP requires participating communities/regions to adopt minimum floodplain management standards. This helps reduce risk and bring premiums down to an affordable level. (See above).
• As an added incentive, NFIP has implemented a community rating system or CRS. This provides credit for improving on the minimum floodplain management standards. (Examples may include steps to reduce erosion or measures to protect beneficial floodplain functions.)

Paragraph 6 (Funding)

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BattleCodes

Memorize:

Conceptual:

Calculational: