What are the savings? An Assessment of the National Flood Insurance Program s (NFIP) Community Rating System (CRS) Ajita Atreya Postdoctoral Research Fellow Wharton Risk Management and Decision Processes Center University of Pennsylvania, Philadelphia, PA Email: atreya@wharton.upenn.edu Erwann Michael-Kerjan Executive Director Wharton Risk Management and Decision Processes Center University of Pennsylvania, Philadelphia, PA Email: erwannmk@wharton.upenn.edu Jeffrey Czajkowski Willis Research Network Fellow Wharton Risk Management and Decision Processes Center University of Pennsylvania, Philadelphia, PA Email: jczaj@wharton.upenn.edu Selected Paper prepared for presentation at the 2015 Agricultural & Applied Economics Association and Western Agricultural Economics Association Annual Meeting, San Francisco, CA, July 26-28 Work in Progress [Do not Site] Copyright 2015 by [authors]. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.
What are the savings? An Assessment of the National Flood Insurance Program s (NFIP) Community Rating System (CRS) Ajita Atreya, Erwann Michel-Kerjan and Jeffrey Czajkowski atreya@wharton.upenn.edu; erwannmk@wharton.upenn.edu; jczaj@wharton.upenn.edu; Center for Risk Management and Decision processes The Wharton School, University of Pennsylvania July, 2015
Outline 1. Linking flood awareness and risk reduction efforts to insurance at the community level: from concept to practice 2. How does the CRS work? 3. What can we learn from 1,200 participating communities? 4. What s Next
Although the importance of encouraging communities to invest in flood risk reduction measures before a disaster is widely recognized, this has typically proven to be a challenge in practice Incentive-based programs can go a long way in this regard Insurance is ideally placed to play that role
But We ve reviewed 20 residential flood insurance markets around the world as part of the Alliance work (Atreya et al, 2014) Surprisingly, for most of them there is no direct link between flood insurance pricing and the adoption of risk reduction measures (those two dimensions remain two different worlds) One exception is found in the United States with the National Flood Insurance Program--NFIP (a federally-run program and the main provider of residential and small business flood insurance since 1968)
NFIP integrates three key dimensions of community flood resilience Flood Maps Flood Mitigation Flood Insurance
Established in 1990 the NFIP s Community Rating System (CRS) is a voluntary incentive program that recognizes and encourages community floodplain management activities that exceed the minimum NFIP requirements. As a result, flood insurance premium rates are discounted to reflect the reduced flood risk resulting from the community actions meeting the three goals of the CRS: Reduce flood damage to insurable property; Strengthen and support the insurance aspects of the NFIP, and Encourage a comprehensive approach to floodplain management
Outline 1. Linking flood awareness and risk reduction efforts to insurance at the community level: from concept to practice 2. How does the CRS work? 3. What can we learn from 1,200 participating communities? 4. What s Next?
CRS : Activities and Credits 19 creditable high-level activities, organized under 4 main series Activities Maximum Possible Points Activities Maximum Possible Points 300 Public Information Activities 310- Elevation Certificates 116 320- Map information Services 90 500 Flood Damage Reduction Activities 510- Floodplain Management Planning 622 330- Outreach Projects 350 340- Hazard Disclosure 80 350- Flood Protection Information 125 360- Flood Protection Assistance 110 370- Flood Insurance Promotion 110 400 Mapping and Regulations 410- Floodplain Mapping 802 420- Open Space Preservation 2020 430- Higher Regulatory Standards 2042 440- Flood Data Maintenance 222 450- Storm water management 755 520- Acquisition and Relocation 2250 530-Flood Protection 1600 540-Drainage System Maintenance 570 600 Warning and Responses 610-Flood Warning and Response 395 620- Levees 235 630-Dams 160 Total 12,554
CRS : Activities and Credits Element Detail Activities 300 Public Information Activities Maximum Possible Points 310- Elevation Certificates 116 320- Map information Services 90 330- Outreach Projects 360 340- Hazard Disclosure 80 350- Flood Protection Information 125 360- Flood Protection Assistance 110 370- Flood Insurance Promotion 110 400 Mapping and Regulations 410- Floodplain Mapping 802 420- Open Space Preservation 2020 430- Higher Regulatory Standards 2042 440- Flood Data Maintenance 222 450- Storm water management 755 Each creditable activity has one or more specified elements and associated points
22,000 NFIP participating communities Approximately 19,000 with NFIP policies-in-force 1,200 participate in the CRS (i.e., CRS score of 9 or lower); represent 2/3 of all NFIP insurance policies in the country
CRS : Credits and Discounts CRS Classes and NFIP premium reductions CRS Class Credit points Premium reduction for residences in SFHA (i.e., 100 year floodplain) Premium reduction for residences outside SFHA Number of communities benefitting (2011) 1 >4,500 45% 10% 1 2 4,000-4,499 40% 10% 2 3 3,500-3,999 35% 10% 1 4 3,000-3,499 30% 10% 5 5 2,500-2,999 25% 10% 66 6 2,000-2,499 20% 10% 151 7 1,500-1,999 15% 5% 285 8 1,000-1,499 10% 5% 464 9 500-999 5% 5% 217 10 (mostly inactive) 0-499 0 0 Note - SFHA: Special flood Hazard Areas (high risk of flood)
Outline 1. Linking flood awareness and risk reduction efforts to insurance at the community level: from concept to practice 2. How does the CRS work? 3. What can we learn from 1,200 participating communities? 4. What Next?
CRS Communities by State
CRS Classes : Geographic Distribution Class 1: City of Roseville, CA Class 2: City of Tulsa, OK King County, WA Class 3: Pierce County, WA Class 4: Charleston County, SC Sacramento County, CA City of Fort Collins, CO Skagit County, WA Snohonish County, WA Source: FEMA (as of 2011)
A Positive Trend: CRS distribution of communities across classes & over time % of participating communities 60 50 40 30 20 10 0 9 8 7 6 CRS Class 5 4 3 2 1 1998 2011
CRS : Distribution of scores across activities Contribution of each activity (in percentages) to the total mean score Easier activities represent the majority of the scores Class/Series Series 300 Public Information Activities Series 400 Mapping and Regulations Series 500 Flood Damage Reduction Activities Series 600 Warning and Responses Total 1 10.5 49.2 35.5 4.9 100 2 15.5 49.3 29.1 6.1 100 3 16.7 59 19.7 4.6 100 4 17.5 54.4 20.2 7.9 100 5 18.8 47.5 27.3 6.4 100 6 22.1 50.2 19.3 8.3 100 7 24.1 48.8 19 8.1 100 8 27.9 44 19.5 8.6 100 9 37 34.2 19.1 9.7 100
Number of CRS Communities Rate of Retention (%) Average CRS retention rate is high at 99% 50 100 49 49 46 40 43 90 35 30 31 80 20 24 25 20 27 70 10 0 11 12 12 11 10 10 8 5 3 4 3 3 0 0 1 6 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Years # dropped # Added % Retention 60 50
Years Every year we see progress with communities moving up in classes Movement in CRS classes 2010-2011 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004 2002-2003 2001-2002 2000-2001 1999-2000 1998-1999 0 20 40 60 80 100 120 140 160 180 200 Number of CRS Communities 1 2 3 4-1 -2
Outline 1. Linking flood awareness and risk reduction efforts to insurance at the community level: from concept to practice 2. How does the CRS work? 3. What can we learn from 1,200 participating communities? 4. What Next?
Still progress needs to be made and FEMA is looking for ways to increase participation and activity level (CRS score). Approximately 18,000 CRS inactive communities would benefit from being more actively involved in the CRS While most active communities participate in a large number of activities (good breadth) the intensity of such participation is generally low (low depth) (next slide)
Percentage of Maximum Possible CRS: Intensity of participation 100 90 80 70 60 50 40 30 20 10 0 c310 c320 c330 c340 c350 c360 c410 c420 c430 c440 c450 c510 c520 c530 c540 c610 c620 c630 CRS Activities 1998 2005 2006 2011
CRS: Activity in High-Risk areas