Residents of communities that require hurricane-resistant homes get a break on the cost of flood ins., but does it lower FEMA’s overall costs? A study says yes.
WASHINGTON – The Federal Emergency Management Agency’s (FEMA) Community Rating System (CRS) provides financial incentives to communities that mitigate against storm damage, essentially, “We’ll charge you less for flood insurance if you agree to make building changes designed to minimize costs after a storm.”
But does FEMA’s lost revenue from policies cost less than the money saved by fewer claims following a flood disaster? A new study suggests that it does.
Research published Thursday in the journal Environmental Research Letters examines the effectiveness of CRS. Authored by researchers from Environmental Defense Fund and the Department of Earth and Planetary Sciences at the University of California, Davis, the study examines how the program has effectively reduced flood damages. It also suggest improvements.
CRS is part of the National Flood Insurance Program (NFIP) designed to reduce flood loss claims by providing a financial carrot to communities. In exchange for community engagement in a range of risk communication and reduction activities, CRS provides resident discounts on NFIP premiums ranging from 5% to 45%.
Looking at NFIP claims, policies and CRS data between 1998 and 2020, the researchers found that one type of activity was most effective: The ones related to “flood damage reduction.”
Those reduction activities include buyouts and relocation of floodplain buildings, plus building mitigation techniques, such as floodproofing, elevation changes and other structural projects. Communities implementing these activities reported 20-30% less damage claims than communities without such activities.
CRS is a carrot-and-stick approach to behavior change because it rewards communities and homeowners (lower NFIP premiums) if they make changes that help NFIP save money (lower payouts after a storm).
“FEMA’s Community Rating System serves as an effective model for other federal market-based programs seeking to incentivize community-level investment in climate resilience,” says Dr. Jesse Gourevitch, a postdoctoral fellow at Environmental Defense Fund and lead author of the study. “As climate change increases the frequency and severity of major flood events, we expect that the benefits of FEMA’s Community Rating System will only continue to grow.”
However, the system isn’t perfect. Researchers found issues regarding equity and efficiency.
The program pays the costs of CRS in terms of premium discounts, but receives benefits twice: once by covering premium discounts through a cross-subsidy surcharge on all policyholders, and again from reductions in claims paid out of NFIP.
“This research confirms that FEMA’s Community Rating System is an effective tool for reducing flood risk nationwide. However, it also highlights FEMA’s troubling practice of ‘cross subsidizing’ CRS, effectively double-billing for the program through a “tax” on policyholders in communities that do not participate in CRS,” says Nicholas Pinter, professor and associate director of the UC Davis Center for Watershed Sciences.
The researchers’ five recommendations are explained in detail in an online article. They include:
- Expand community participation in CRS.
- Critically examine cross-subsidization of premium discounts.
- Revise the allocation of CRS points to favor the most effective activities.
- Consider alternative incentive structures, such as transferring CRS credits directly to government entities.
- Increase local incentives for community-level investment in climate adaptation.
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