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A Proposed Design for Community Flood Insurance
Wednesday, December 16, 2015
A Proposed Design for Community Flood Insurance by Carolyn Kousky and Leonard Shabman from Resources for the Future

Many areas in the United States are vulnerable to floods. However, the purchase of flood insurance, an important contributor to community resilience, remains low. Insurance payments, unlike federal disaster aid, can provide rapid and higher payouts to households after a disaster and the pricing structure can be used to encourage investments in risk reduction. To increase insurance coverage, one idea that has been suggested is for communities to purchase flood insurance on behalf of floodplain residents.

In this new Resources for the Future report, researchers Kousky and Shabman present a detailed design for community insurance that could be attractive to some communities and be a feasible offering of the National Flood Insurance Program, private (re)insurance company or a municipal pool. The design ideas in the report are based on in-depth consultations with stakeholders.

The proposed design is grounded in principles of parametric insurance, whereby payment is based on a predefined triggering event, such as the reading on a stream gage. A benefit of a parametric design is that it simplifies the process and reduces the costs of settling claims. Administrative savings can be passed on to the community.

A community policy would provide widespread but only basic coverage. Full coverage would be secured if an individual purchased a supplemental policy. The payment required for the community policy plus the premium for supplemental coverage can be less than the cost of an individual NFIP policy.

Some of the key findings of the study, which was funded by the New York Community Trust and vetted by ASFPM, were:

  • People who buy insurance are better able to recover after a flood event because claims payments can be larger and timelier than relying on federal disaster aid, but many people at risk do not buy flood insurance.
  • Community flood insurance is a single policy, purchased by a local governmental or quasi-governmental body, which provides coverage to a large group of properties.
  • Community insurance can draw on principles of parametric insurance to reduce costs—savings which can be passed on to the community.
  • The proposed community policy design makes it attractive for communities to buy and for insurers to offer. However, moving from concept to implementation will require engagement of communities with insurers to increase their understanding of the concept and make refinements where necessary. 






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