Addressing Affordability in the National Flood Insurance Program

Abstract

There is often tension between setting insurance premiums that reflect risk and dealing with equity/affordability issues. The National Flood Insurance Program in the United States recently moved toward elimination of certain premium discounts, but this raised issues with respect to the affordability of coverage for homeowners in flood-prone areas. Ultimately, Congress reversed course and reinstated discounted rates for certain classes of policyholders. We examine the tension between risk-based rates and affordability through a case study of Ocean County, New Jersey, an area heavily damaged by Hurricane Sandy. We argue that the NFIP must address affordability, but that this should not be done through discounted premiums. Instead, we propose a means-tested voucher program coupled with a loan program for investments in hazard mitigation.