Benefits of and strategies to update premium rates in the US National Flood Insurance Program under climate change

Fang Zhang, Ning Lin, Howard Kunreuther

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The United States’ National Flood Insurance Program (NFIP) has accumulated over $20 billion in debt to the US Treasury since 2005, partly due to discounted premiums on homes in flood-prone areas. To address this issue, FEMA introduced Risk Rating 2.0 in October 2021, which is able to assess and charge more accurate and equitable rates to homeowners. However, rates must be continually updated to account for increasing flood damage caused by sea level rise and more intense hurricanes due to climate change. This study proposes a strategy to adopt updated premium rates that account for climate change effects and address affordability and risk mitigation issues with a means-tested voucher program. The strategy is tested in a coastal community, Ortley Beach, NJ, by projecting its future flood risk under sea level rise and storm intensification. Compared with using static rates for all the properties in Ortley Beach, the proposed strategy is shown to reduce the NFIP's potential losses to the community from 2020 to 2050 by half (from $4.6 million to $2.3 million), improve the community's flood resistance, and address affordability concerns. Sensitivity analysis of varying incomes, loan interest rates, and conditions for a voucher indicates that the strategy is feasible and effective under a wide range of scenarios. Thus, the proposed strategy can be applied to various communities along the US coastline as an effective way of updating risk-based premiums while addressing affordability and resilience concerns.

Original languageEnglish (US)
Pages (from-to)1627-1640
Number of pages14
JournalRisk Analysis
Volume43
Issue number8
DOIs
StatePublished - Aug 2023

All Science Journal Classification (ASJC) codes

  • Safety, Risk, Reliability and Quality
  • Physiology (medical)

Keywords

  • NFIP flood insurance
  • affordability
  • climate change

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