The Federal Emergency Management Administration,
using Census data, compared income data and current pricing to investigate whether
to revise rates on affordability criteria. The National Flood Insurance Program
chronically has run in the red, prompting changes over the past several years
but remains in flux as Congress can’t decide how to alter matters to put it in
balance.
The report noted nationally that policyholders
earned about half again what non-policyholders made. This suggests an affordability
issue, confirmed in that in flood-prone areas twice as many low-income
households don’t have insurance than do, with a smaller gap in other areas,
while the ratio roughly is reversed for those of higher incomes.
While nationally those with lower incomes were more likely to live in flood-prone areas, that was the opposite in Louisiana. This likely comes from the state’s reliance on its rivers and maritime geography to generate wealth, with inland areas away from water transport producing less economic output.
In part, these distributions come from that fact
that flood insurance prices only indirectly tie to the actual property value.
In low-
to- moderate-risk areas, rates depend upon choices of coverage made by
buyers and can be as low as $100. However, in high-risk areas a variety of
factors come into play, such as year of construction, elevation, and history, which
can send rates dramatically higher. Note that actual value of the property
makes no difference. Further, the existing rate structure for flood-prone areas
tends to raise
relative costs on households worth fewer than $60,000 as compared to those
above.
This skew in buying insurance by income likely
derives from households without mortgages – as residences in high-risk areas
must have it if borrowing from a financial institution – disproportionately
comprised of inherited properties and/or elderly owners. In these stations in
life, families may not be able to afford moving to at least comparable property,
and even with the resources to maintain the property and pay taxes on it, some
households may find it financially burdensome to pay for flood insurance.
Additionally, the recent practice of federal disaster bailouts – with Louisiana
a tremendous recipient of these after the hurricane disasters of 2005 and somewhat
less so after the flood disasters of 2016 – may discourage such households from
paying for insurance.
Yet the statistics show a number of them do. All
of these considerations lead to some possible reforms, ordered below in order
of comprehensiveness, that could make flood insurance more affordable to lower-income
households without significant cost-shifting onto others.
First, FEMA should scrap its $60,000 base rate
calculation that presently skews costs and further open up private sector
underwriting while refusing to make future disaster relief appropriations. The
changed calculus and disincentive to freeriding that encourages a broader ratepaying
base should decrease rates for many more lower-income households than the opposite.
Second, assessed property value could become part
of the equation, thus removing the insurable cap. Instead of giving owners
tiers or deductible options, tie in the house’s value to the rate, with a
factor for rebuilding cost built in. For many low-income owners, this would decrease
rates while it could increase these for some higher-income households –
although many of them overall may pay less, because with current policy caps
many buy additional private insurance to make sure their homes are fully covered
that they could forgo with this reform.
Third, as previously
recommended, make flood insurance mandatory for every homeowner, with rates
according to risk and value. Some will pay rates perhaps as low as a dozen bucks
a year, but with everybody paying, rates for current policy-holders likely
would go down across the board, except perhaps for very expensive homes in
risky areas. But as income and home value are strongly related, this, as well
as in the case of the second option, makes sense in terms of ability to pay.
These changes would create a fairer playing field
than would options
like discounts built in regardless of income or direct subsidization to encourage
purchasing by low-income households for which others will pay, while achieving goals
of greater utilization and pricing more attuned to value and household ability to
pay. Alternatives such as these Louisiana’s members of Congress must seek as
the institution crawls towards a lasting programmatic reform.
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